Contrarian and momentum investment strategies implemented to test the weak-form market efficiency have provided mixed results for the US and Australian equity markets. Positive autocorrelations of stocks returns for the short horizon of 3-12 months in the Australian equity market suggest that a momentum investment strategy would generate profitable returns for the arbitrage, "winner" minus "loser" portfolio. This study implements 16 trading strategies consistent with the momentum investment theory to test the weak-form efficiency of the Australian equity market. The results suggest that these strategies generate negative returns for the arbitrage portfolio at the end of the holding period, but are only significant for more of the longer period strategies.
Firm size is a possible explanation for the negative returns generated, since the Australian market is known to have a large number of small stocks. Coupled with seasonality effects for the months of January and July where tax-loss selling is prevalent, the results are not surprising. Therefore, it is likely that the momentum strategy in Australia is capturing the size effect more than anything else. Not withstanding the fact the strategy generates negative returns for the arbitrage portfolios, once transaction costs are incorporated for such strategies, any "profitable" returns are eroded. The Australian equity market is in fact weak-form efficient.