Re: st: Implementing a Momentum Investment Strategy with Stata

[Richard Herron <richard.c.herron@gmail.com>]

You're right it is -egenmore- from SSC.

The -egen, xtile- command should generate a variable -portfolio- with
integers 1 through 10. When there is no return for that month -egen,
xtile- won't be able to assign a portfolio.

The -f6.-, -l6.-, and -s6.- are time series operators that shift
forward, lag, or seasonally difference by 6 observations. Before you
can use them you will need to tell Stata your panel identifiers with
-tsset- or -xtset-.

I don't understand your return notation. You should just have one
variable that contains the n month returns for all stocks. After you
-tsset- your data (something like -tsset permno date_ym-) then the
code from my first reply should work.

On Tue, Mar 6, 2012 at 10:49,  <schmani@gmx.de> wrote:
> Dear Robson, dear Richard,
>
> thank you very much for your input!
> I haven't yet decided whose approach I am gonna follow, hence I have some more issues for clarification:
>
> Robson:
> By introducing an "identifier" variable do you mean that I need to have one variable for each time-window and hence e.g. tag the top 10 performers with a "1"? How can I achieve this when I only have 385 observations, yet the before-mentioned 1400 stocks? I'm not sure I got the intuition behind your idea. Could you kindly clarify this for me?
>
> Richard:
> I assume you meant the egenmore package from ssc, since I could not find egemore? You are right that Jegadeesh and Titman used equally weighted portfolios, this will also be the approach I follow for my study. I tried using your egen command for one sample-portfolio. Is it correct that the generated variable "portfolio" now has only 1s in it for the time period where the stock has returns?
> I probably need to fully understand what you were trying to achieve with your usage of f6., l6. and f6. Could you kindly elaborate on that? I should have mentioned that I have log-returns (named: return_v#-return_v####) whose observations consist of the cumulated previous 6m returns where available.
> It seems to me that the command generates a portfolio based on only one asset (ret6), not on a portfolio of several assets.
>
> (my command looked like this: egen portfolio = xtile( return_v1377), nquantiles(10) by (date)  ) Do I have to use the whole set of data (i.e. return_v#-return_v####) instead of just one return set?
>
> Your help is greatly appreciated, as I am quite a novice in Stata.
>
> Best regards,
>
> Daniel
>
>
> -------- Original-Nachricht --------
>> Datum: Sun, 4 Mar 2012 17:40:42 -0500
>> Von: Richard Herron <richard.c.herron@gmail.com>
>> An: statalist@hsphsun2.harvard.edu
>> Betreff: Re: st: Implementing a Momentum Investment Strategy with Stata
>
>> I don't think there's a need to use -rolling-. I think there are two
>> main steps here. Generating the portfolios, then generating the time
>> series of returns for eash of these portfolios.
>>
>> I would generate the portfolios using -xtile- from the -egemore- package
>> (SSC).
>>
>> generate ret6 = s6.price / l6.price
>> egen portfolio = xtile(ret6), nquantiles(10) by(date_ym)
>>
>> where -ret6- is your holding period return and -date_ym- is the
>> year-month date (say 2001m5). Now generate the portfolio holding
>> period returns using collapse and time series operators.
>>
>> collapse (mean) f6.ret6, by(date_ym portfolio)
>>
>> You may also want to use weightings to determine portfolio weights
>> (although I think Jegadeesh and Titman is all equally weighted). Now
>> you can use these portfolios to generate returns to your strategy.
>> HTH.
>>
>> On Sun, Mar 4, 2012 at 09:20, Robson Glasscock <glasscockrc@vcu.edu>
>> wrote:
>> > Christopher Baum's "An Introduction to Stata Programming" discusses
>> > moving-windows in Chapter 8. The -rolling- command is mentioned as
>> > well as Cox and Baum's -mvsumm- and -mvcorr- programs (available from
>> > SSC). Looking into these may help you think about a modified approach
>> > to your problem.
>> >
>> > Instead of using matrices, I wonder if it would be better to generate
>> > two new variables that would help you identify the top 10% of firms in
>> > each window. First, generate a "window" variable that would take on a
>> > value of 1 for months 1-6, 2 for months 2-7, 3 for months 3-8, etc.
>> > Second, generate an "identifier" variable that tags the top 10% of
>> > firms in each window. You would know exactly which firms were included
>> > in each window and then it would be possible for you to calculate the
>> > returns for those firms over the next six months. Or maybe clever use
>> > of -rolling- is the better approach here. I'm not sure, but I hope
>> > this is enough to get you started.
>> >
>> > best,
>> > Robson Glasscock
>> >
>> >
>> > On Sun, Mar 4, 2012 at 7:43 AM,  <schmani@gmx.de> wrote:
>> >> Dear all,
>> >>
>> >> I am trying to implement a Momentum Strategy following
>> Jegadeesh/Titman(1993): Returns to Buying Winners and Selling Losers: Implications for
>> Stock Market Efficiency, JoF 48(1), pp. 65-91.
>> >>
>> >> I have monthly returns for ~1400 stocks for a total of 385 time periods
>> and now have to proceed in the following way:
>> >>
>> >> 1) build cumulated returns over a formation period of 6months (I did
>> that by generating new variables)
>> >>
>> >> 2) select the top 10% performing stocks in order to invest. This is
>> done every month in order to generate so-called "overlapping" portfolios.
>> >>
>> >> 3) invest in those stocks for a holding period of 6 months
>> >>
>> >> 4) determine the average of the returns and adjust for risk
>> >>
>> >>
>> >> For now, my approach was to generate matrices for every month t that
>> consist of the cumulated returns over the previous 6 months.
>> >> However I can not find an efficient way to sort these matrices while
>> being able to identify which assets to invest in (this is crucial as I need
>> to tell Stata somehow which assets to invest in).
>> >>
>> >> I am sure there is a better way to sort the cumulated returns of the
>> previous 6 months in every month t while still being able to somehow "track"
>> the variable name in order to invest in the corresponding stock.
>> >> I hope I made myself clear, any help would be greatly appreciated!
>> >>
>> >> Best,
>> >> Daniel
>> >> --
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