(An) empirical study on different weighting schemes of value and momentum strategies in the Korean equity market

Abstract

Widespread empirical studies have documented value and momentum styles investment in global equity markets including Korea to generate significant risk premium. In this paper, I suggest two main academic contributions. First, I empirically find the best performing long-only pure-play strategy of value and momentum in the Korea equity market. Second, I test three different weighting schemes of how to combine two prominent style factor portfolios to evaluate which weighting methodology improve pure-play portfolio’s performances. I apply the static weighting schemes of 50/50 COMBO, time-varying weighting schemes according to FTSE Russell index methodology and market-status dependent weighting scheme using predictive regression. The empirical result in this paper imply that 50/50 COMBO fail to improve Sharpe ratio of each pure-play style portfolio regardless of slight negative correlation. However, long-only factor portfolios adopting either time-varying weighting schemes or market-status dependent weighting scheme illustrate significant improvement in performances.