Combining value and momentum indicators in varying stock market conditions: The Finnish evidence

The purpose of this paper is to examine the added value of combining a momentum indicator with a value indicator in varying stock market conditions.

A comprehensive sample of Finnish non‐financial stocks is first divided into three‐quantile portfolios based on valuation multiples and composite value measures. The value and glamour portfolios are divided further into two‐sextile portfolios based on the price momentum indicator. The performance of portfolios is evaluated on the basis of their raw and risk‐adjusted returns. Moreover, the impact of the stock market cycle on relative performance of quantile portfolios is examined.

Taking account of price momentum beside relative valuation criteria enhances the performance of most of the value‐only portfolios during the full sample period (1993‐2009). During bullish conditions, the inclusion of a momentum criterion somewhat adds value to an investor, but during bearish conditions this added value is negative.

The sample of stocks is not large in spite of its comprehensiveness from the local stock market aspect. Future studies can apply the approach to other stock markets.

The paper provides useful implications in portfolio management. The combination of the value and momentum criteria has paid off to the investor, despite the fact that its added value during bearish periods is negative, on an average.

This is the first time that the impact of the stock market cycle on the added value of combining price momentum with composite value measures as a portfolio‐formation criterion is examined.