momentum strategies for equity versus equity

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The goal of this paper is to examine momentum strategies for both equity and equity derivative markets from an active Asian portfolio management point of view.
MOMENTUM STRATEGIES FOR EQUITY VERSUS EQUITY DERIVATIVES AND APPLICATION TO ASIA PORTFOLIO MANAGEMENT Tony Naughtona, Malick O. Syb, and Vikash Ramiahc a, b, c

School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia.

Abstract This paper provides practical insight on the returns generated by momentum strategies in both the physical equity and derivative markets, specifically looking at warrants and options listed in six selected Asian Capital markets, namely (in alphabetical order), Hong Kong, Japan, Korea, Malaysia, Singapore, and Taiwan. Selection is based on the volume and density of transactions. We explore the feasibility of applying momentum strategies in constructing a welldiversified Asian portfolio while achieving profit maximization in all market conditions. Our results show that momentum profits are generally quite substantial across our six selected Asian capital markets for both equity and equity derivatives investment and more profitable for derivative markets than the underlying equity markets. We find that momentum investing is indeed less volatile than outright investing. Also, momentum investing is generally less correlated when Asian markets experience both positive and negative returns. We find weaker co-movement between the equity and equity derivative momentums than outright investing in both equity and equity derivatives instruments and correlations between equities investing are highest across the Asian countries. We show that the inclusion of equity derivatives in a portfolio is not redundant and by adding momentum equity derivatives in the portfolio, we indeed create a well-diversified Asian portfolio with significant positive returns. Profit maximization is better achieved by combining mainly the outright equities positions in our Asian portfolio than by investing in momentum strategies (the return from outright investing is much higher than from momentum investing). A well-diversified Asian portfolio is best created when it comprises momentum investments (the returns are superior and significant). Keywords:

Momentum investing, Asian countries, correlation, profit maximization, diversification.

* Corresponding Author: Malick O. Sy 5 Siglap Road, #15-44 Singapore 448908, Singapore Phone number: +65 9789 6545 Fax number: +65 6443 1060

Email: [email protected]

Electronic copy available at: http://ssrn.com/abstract=1087252

Page 1

I.

INTRODUCTION

Momentum strategy is a topic of hot debate. Empirical studies1 around the world have shown that momentum strategies are lucrative. This investing strategy of buying prior winners and selling short prior losers has been significantly profitable, both statistically and economically. Many researchers have attempted to explain this momentum investment strategy. De Long, Shleifer, Summers, and Waldman (1990) and many others2 provide a behavioral explanation for this anomaly. Recent studies such as those of Lesmond, Schill, and Zhou (2004) and Korajczyk and Sadka (2004) challenge the well-accepted doctrine on the basis of transaction costs. Hogan, Jarrow, Teo, and Warachka (2004) empirically investigate whether momentum and value trading strategies constitute statistical arbitrage opportunities in the United States. After adjusting for transaction costs, the influence of small capitalization stocks, margin requirements, liquidity buffers for the marking to market of short sales, and higher borrowing rates, they still find evidence that these strategies generate statistical arbitrage. It is fair to state that momentum effects do exist in most equity markets around the globe. Most of these studies identify momentum profits on outright equity markets worldwide. Today, with the emergence of huge hedge funds together with their complex investment strategies either for profit maximization or risk management, we have experienced significant development in the use of equity derivative instruments such as equity and covered warrants, options, and futures. The goal of this paper is to examine momentum strategies for both equity and equity derivative markets from an active Asian portfolio management point of view. Research conducted by Aitken, Harris, McIrish, and Segara (2005) concludes that equity warrants are not redundant and that the inclusion of this derivative instrument in an investor’s portfolio can provide diversification benefits through enlargement of the minimum variance frontier. Our study selects six Asian equity and equity derivatives (warrants and options) markets based on the volume and density of transactions. These countries are (in alphabetical order) Hong Kong, Japan, Korea, Malaysia, Singapore, and Taiwan. 1

Drew, Veeraraghavan, and Ye (2004), Rouwenhorst (1998), Rouwenhorst (1999), Lee and Swaminathan (2000), Chan, Hameed, and Tong (2000), Cleary and Inglis (1998), Schiereck, DeBondt, and Weber (1999), Liu and Lee (2001), Jegadeesh (1990), Cutler, Poterba, and Summers (1991), Jegadeesh and Titman (1993), Jegadeesh and Titman (2001), Grundy and Martin (2001), Chan, Jegadeesh, and Lakonishok (1996), Hogan et al. (2004), Ellis and Dylan (2004), Demir, Muthuswamy, and Walter (2004), Menkhoff and Schmidt (2005), and many others. 2

Barberis, Shleifer, and Vishny (1998), Daniel, Hirshleifer, and Subrahmanyam (1998), Grinblatt and Han (2001), and Hong and Stein (1999).

Electronic copy available at: http://ssrn.com/abstract=1087252

Page 2 We calculate momentum returns for both physical equity and equity derivatives and compare these for each of the countries in the sample. The correlations among momentum profits both for outright equity and equity derivatives are also computed and compared within and across the countries within the context of international portfolio diversification and profit maximization. We also analyze the separation of the long-side from the short-side positions. Our results, in brief, are as follows. The combination of outright equity derivatives and equity derivatives momentum transactions together has produced twice as much as the returns of outright and momentum equity positions. This indeed validates the lucrative investment and issuing of covered and equity warrants in Asian financial markets and also explains the magnificent growth on the issuing of covered warrants by international investment banks in Asia during our period of study from July 2006 to December 2006. In general, we have very considerable positive momentum profits across Asian countries and the momentum profits from equity derivatives are much larger than (1.25 to 4.68 times) the momentum returns from equity positions, with the exception of Taiwan and Japan. At the same time, the returns of the outright equity derivatives in our sampling are higher than those of the outright equity positions. Derivative investments perform much better than investments in equity because of the emerging leverage effects of covered warrants. We examine the correlation from the perspective of each Asian portfolio manager and globally find high positive correlations between cash market indices return and low (sometimes negative) correlations between equity derivatives positions across Asia. Also, Asian international momentum investors enjoy greater benefits of diversification mainly by combining investments in momentum strategies on equity and equity derivatives positions. Our study finds that the correlations between equity returns across Asian countries decrease significantly in both up and down market conditions, with the lowest correlations occurring when Asian markets experience positive returns. We also observe that the correlations between momentum returns for both equity and equity derivatives are not necessarily higher across countries when these countries experience positive and negative market returns.

Page 3

II.

DATA COLLECTION AND METHODOLOGY

Daily stocks, warrants, and options prices are collected from Datastream International and Bloomberg. Each selected stock must have equivalent listed warrants or options (equity derivatives). The following countries have been selected, in no specific order: Japan, Hong Kong, Korea, Singapore, Taiwan, and Malaysia. These countries have the most active equity and related derivatives in Asia. The period selected was from July 3, 2006, to December 29, 2006, due to the liquidity of these markets and both equity and warrants and options prices were available. We adopt an active portfolio management approach, since the selected markets have experienced a huge inflow of hedge funds engaging strategies bordering on long-short trading and scalping. Momentum strategies are evaluated as follows: A 1-day ranking period is chosen, over which winners and losers are determined, as well as a 1-, 5-, 10-, 15-, or 20-day investment period, over which winners are held and losers sold short. Returns for each period for both equity derivatives (warrants and options) and equity for each country are computed. Momentum returns are the average returns of the holding period for both equity and equity derivatives. Returns are calculated as the logarithm of the current day’s price divided by the logarithm of the previous day’s price. Portfolio returns of equity and equity derivatives are calculated and compared to the momentum returns for equity and equity derivatives, respectively, for each country and across countries to see the benefit of momentum strategies and to find out which country (or countries) in Asia could offer better momentum returns. For a perspective view on portfolio diversification strategy, we examine first the correlation between momentum return strategies for both equity derivatives and the underlying equity within each country and then the correlations of momentum returns across countries for both derivatives and outright equity investments. Also, the correlations between momentum returns and market indices returns are computed and compared in each country and across countries. Long winners and short losers portfolios are evaluated separately to find out which side is more profitable. The degree of market correlation and momentum is examined in up and down market conditions as well.

Page 4

III.

EMPIRICAL OUTCOME

Momentum Profits Exhibit 1 displays the time series patterns on a daily basis of the equity price momentum returns (MRe), equity derivatives price momentum returns (MRed), equity derivatives returns (Red), and equity return (Re) by country. We now examine the returns and momentum returns for both equity and equity derivatives investments. In general, the momentum profits for both securities are significantly positive across Asian countries. Table 1(a) shows the average annual returns and momentum strategies returns for both equities and equity derivatives positions for the six selected countries and Exhibit 2 compares these average annual daily returns, namely, equities return (Re), equities momentum return (MRe), equities derivatives return (Red), and equities derivatives momentum return (MRed), by country and percentage based. Average Annual Returns

Singapore

Equities (Re) 41.32%

Equities Momentum (MRe) 23.10%

Equity Derivatives (Red) 73.79%

Equity Derivatives Momentum (MRed) 97.92%

Malaysia

35.36%

21.22%

60.72%

99.29%

Hong Kong

40.62%

48.08%

52.37%

60.30%

Korea

21.74%

32.07%

24.38%

48.02%

Taiwan

30.84%

22.10%

35.19%

20.26%

Japan

21.44%

46.01%

22.63%

6.03%

Average

31.89%

32.10%

44.85%

55.30%

Table 1(a): Average Annual Returns and Momentum Investment in Both Equities and Equity Derivatives for Six Countries

Among all the countries, the momentum profit from Malaysian equity derivatives is the highest (99.29%). This explains the popularity of covered warrants listings by local and international investment banks in Malaysia during this period. The Singaporean equity derivatives momentum return ranked the second highest (97.92%) and the Singaporean equity derivatives outright return is the third highest (73.79%) annual average return.

Page 5 During our period of study, the number of listings for covered warrants in Singapore has been as significant as that in Malaysia, showing that covered warrants are a lucrative investment vehicle for local and foreign funds on blue chip stocks. The three lowest annual average returns are the Japanese equity derivatives average annual return (6.03%), the Taiwanese equity derivatives average annual return (20.26%), and the Malaysian equities momentum average annual return (21.22%), respectively. Within each of the six countries, Hong Kong, Korea, and Japan show evidence that the profitability of momentum equity investing is indeed better than outright equity investment. Singapore, Malaysia, Hong Kong, and Korea show that momentum equity derivatives investment is more profitable than outright equity derivatives investment. Taking the average of all six countries, the momentum profits for equity (32.10%) and equity derivatives (55.30%) investments are both higher than their respective outright investments (31.89% for equity and 44.85% for equity derivatives). Table 1(b) shows the ratio of equity derivatives return to equity return (column 1), the ratio of equity derivatives momentum return to equity momentum return (column 2), and the ratios of the returns on momentum investing to outright investing on both equity positions and equity derivatives positions (last two columns).

Singapore

Ratio of Returns on Ratio of Returns on Ratio of Returns on Ratio of Returns on Equity Derivatives Equity Derivatives Equities Momentum to Momentum to Equity Derivatives Momentum to to Equities Position Equities Equity Derivatives Equities Position Momentum Position 1.79 times 4.24 times 0.56 times (1.79) 1.33 times

Malaysia

1.72 times

4.68 times

0.60 times (1.67)

1.64 times

Hong Kong

1.29 times

1.25 times

1.18 times

1.15 times

Korea

1.12 times

1.50 times

1.48 times

1.97 times

Taiwan

1.14 times

0.92 times

0.72 times

0.58 times

Japan

1.06 times

0.13 times

2.15 times

0.27 times

Note: The values in brackets show the inverse of the numbers. Table 1(b): Comparison of Average Annual Returns and Momentum Returns for Both Equities and Equity Derivatives Across Six Countries

With the exception of Taiwan and Japan, the momentum profits from equity derivatives are much larger than the momentum returns from equity positions, ranging from 1.25 times for Hong Kong to 4.68 times for Malaysia (see column 2). At the

Page 6 same time, momentum investing fetches higher returns than its outright investing in equity derivatives positions, ranging from 1.15 times for Hong Kong to 1.97 times for Korea (see last column). The equity derivatives investment returns in our sampling are higher than the returns of the equity positions for all the six countries, ranging from 1.06 times for Japan to 1.79 times for Singapore (see column 1). Equities momentum investing is indeed not as profitable as equity derivatives momentum investing. We note that during our period of study for Singapore and Malaysia, in which equity derivatives (warrants) are actively introduced and traded, the average annual returns of the equity derivatives investment are at least 70% higher than the average annual returns of the equities investment. It is interesting to note that the equities returns of Singapore and Malaysia are 1.79 and 1.67 times their respective momentum returns (see column 3 values in brackets). For Hong Kong, where equity derivatives (warrants) are also actively introduced and traded during our period of study, the equity derivatives average annual return is about 29% (1.29 times from column 1) higher than the equities average annual returns. Momentum investing shows profitability for both equities (1.18 times from column 3) and equity derivatives (1.15 times from column 4). Likewise, for Korea, the average annual return of the equity derivatives is only about 12% (1.12 times from column 1) higher than the average annual returns of the equities investing. Momentum investing is viable for both equities (1.48 times from column 3) and equity derivatives (1.97 times from column 4). For Japan, where the average annual return of the equity derivatives is almost equal to the average annual returns of the equities investment (1.06 times from column 1), the momentum strategy is significant for the equities investment (2.15 times from column 3) but insignificant for the equity derivatives investment (0.27 times from column 4). This shows evidence that momentum investing can acquire higher positive returns in both equity and equity derivatives positions than outright investment in equity across our selected Asian countries. Table 2 compares the volatility of returns on outright and momentum strategies for both equity and equity derivatives positions.

Page 7 Volatility Equities Equity Derivatives Momentum Equity Derivatives Momentum (MRe) (Red) (MRed) 0.9748% 1.1000% 1.7719%

Singapore

Equities (Re) 0.7808%

Malaysia

0.5568%

0.3234%

0.8305%

1.4695%

Hong Kong

0.8234%

0.4935%

0.7736%

0.4557%

Japan

0.9987%

0.2543%

0.5231%

0.0353%

Taiwan

0.8852%

0.5222%

0.5338%

0.3882%

Korea

0.8831%

0.4550%

0.6780%

0.6267%

Table 2:

Volatilities of Returns on Outright and Momentum Investing for Both Equities and Equity Derivatives for Six Countries

From a comparison of columns 2 to 1 and 4 to 3 in Table 2, momentum investing is less volatile than outright investing for equity positions (except for Singapore) and equity derivatives positions (except for Singapore and Malaysia). In Singapore and Malaysia, the warrants are indeed more volatile than the stocks positions due to the speculative trading and leverage effects of warrants.

Momentum Return Correlations, Portfolio Diversification, and Profit Maximization Strategies For strategic portfolio management, it becomes useful to know how significant is the correlation between the momentum strategies and market indices within and across countries. If the correlation is considerable, be it positive or negative, it would then be an important factor in profit maximization and diversification strategies, respectively. We have carried out this study with the purpose of accomplishing two main objectives. Objective 1 is to construct across Asia a portfolio that maximizes profit by the use of momentum strategies for both equity and equity derivatives together with investments in equity and equity derivatives positions, respectively. Objective 2 is to construct a well-diversified Asian portfolio with the use of momentum strategies and investments in both equity and equity derivatives cash markets.

Page 8 Maximizing Portfolio Return The idea of Objective 1 is to create a portfolio across Asia with the best combination of investments in equity and equity derivatives and also the use of momentum strategies in both equity and equity derivatives in order to achieve maximum positive portfolio returns. That is to say, we need to look for a high, positive correlation from the combination of equity, equity derivatives, and momentum strategies investments for both. The correlations are in the following 10 forms within and across the six selected countries: (i) (ii) (iii) (iv) (v)

correlation (equity-equity) correlation (equity-equity derivative) correlation (equity-equityMomentumStrategy) correlation (equity-equity derivativeMomentumStrategy) correlation (equity derivative-equity derivativeoutright) (vi) correlation (equity derivative-equityMomentumStrategy) (vii) correlation (equity derivative-equity derivativeMomentumStrategy) (viii) correlation (equityMomentumStrategy-equityMomentumStrategy) (ix) correlation (equityMomentumStrategy-equity derivativeMomentumStrategy) (x) correlation (equity derivative-equity derivativeMomentumStrategy)

= ρ(Re,Re) = ρ(Re,Red) = ρ(Re,MRe) = ρ(Re,MRed) = ρ(Red,Red) = ρ(Red,MRe) = ρ(Red,MRed) = ρ(MRe,MRe) = ρ(MRe,MRed) = ρ(MRed,MRed)

Findings The bar chart on the correlation between equity and equity derivatives price momentum, equity derivatives return, and market return in the Singaporean market versus the five Asian countries is depicted in Exhibit 3 and Table 3 shows the numerical values of these correlations under different market conditions. From the correlation in Table 3(a) of all raw market returns within and across countries, we find that the correlations between the outright equity-equity returns in both countries are the highest when compared with the correlations between outright equity-equity derivative returns and the correlations between outright equitymomentum equity returns within and across the six selected countries. The correlation between Singaporean and Malaysian equity, or ρ(ReSingapore-ReMalaysia), is 0.4279 with the outright equity investment returns; this correlation reduces to 0.1270 [ρ(MReSingapore-MReMalaysia)] when momentum strategy is applied. The correlation between Malaysia and Taiwan, or ρ(ReMalaysia-ReTaiwan), is 0.4099 with the outright equity returns; this correlation also reduces significantly to -0.0405 [ρ(MReMalaysia-MReTaiwan)] with momentum investing.

Page 9 We conclude that for an Asian portfolio, a profit maximization strategy would be better in creating a portfolio comprising mainly of the market indices when ρ(Re, Re) are highest. It seems that momentum strategies have either a considerably low positive correlation or, in many cases, negative correlation. Among the 10 forms of correlation on all returns, the highest correlation of 0.7251 is attained by the portfolio comprising Korean market and Japanese equities. The portfolio comprised of equities of Singaporean and Hong Kong stocks has the second highest correlation, 0.6833, and the third highest correlation, 0.5480, is from the portfolio comprised of equities of Singaporean and Japanese stocks. It appears that the well-structured portfolio strategy, however, would be to combine not only the market indices investment but also momentum strategies for both equities and derivatives positions. Exhibit 4 displays the equity and equity derivatives momentum returns correlation versus the market index correlation across countries. The equity derivatives returns correlation versus the market returns correlation across countries is included as well for reference. In Exhibit 4(a), the x axis is the correlation of each Asian country’s market index return (Re) with the Singapore index return, denoted by ρs(Re,Re). The y axis plots the correlation of each Asian country’s equity price momentum return (MRe) with the Singaporean equity price momentum return, denoted by ρs(MRe,MRe), as Y1, the correlation of each Asian country’s derivatives price momentum return (MRed) with the Singaporean derivative price momentum return, denoted by ρs(MRed,MRed) as Y2, and the correlation of derivative return (Red) of each Asian country with the Singaporean outright derivative return, denoted by ρs(Red,Red), as Y3. We observe the same outcomes through Exhibit 4(b) and Table 4(b), Exhibit 4(c) and Table 4(c), Exhibit 4(d) and Table 4(d), Exhibit 4(e) and Table 4(e), as well as Exhibit 4(f) and Table 4(f), from Malaysian, Hong Kong, Korean, Taiwanese, and Japanese investors' points of view, respectively. This observation again suggests that an Asian portfolio comprised solely of momentum investing is not an advisable profit maximization approach. Nonetheless, this relatively low or negative correlation leads us to achieving Objective 2, a well-diversified portfolio strategy. Correlation With Positive and Negative Market Returns Although momentum investing is less or negatively correlated when the market experiences positive or negative returns, it has been largely documented that an

Page 10 international diversified portfolio is less effective in down markets than in up markets. We investigate the extent of correlation in Asian momentum strategies under these two market conditions. Indeed, if price momentum returns are relatively more highly correlated when the market experiences downside returns than during upside returns, then a money manager will carry more risk when applying momentum strategies across Asian countries. From Exhibit 5(a)(i) and Table 5(a)(i), when the Singapore market experiences positive returns, the market return correlations between Singapore and other Asian countries are low and the price momentums for equity and derivatives have correspondingly low correlations as well. The derivatives return correlation between Singapore and Hong Kong (denoted by the triangle above the 45-degree benchmark line), however, is higher than the market return correlation when the Singapore market experiences positive returns. At the same time, from Table 3(c) column 1, the market indices correlation between Singapore and Hong Kong is the highest when the Singapore market is up. When the Singapore market experiences negative returns in Exhibit 5(a)(ii) and Table 5(a)(ii), market return correlations between Singaporean and other Asian markets are higher compared to the market correlations when the Singaporean market is up. The correlation between price momentum strategies, however, is not necessarily higher when the market experiences downside negative returns. This is evidenced from the correlation between Korea and Singapore and between Japan and Singapore. When the Malaysia market experiences positive and negative returns, respectively, in Exhibits 5(b)(i) and (ii) and Tables 5(b)(i) and (ii), similarly, the market correlations between Malaysia and the other Asian countries are higher in down market conditions (with the exception of Hong Kong and Malaysian market correlations) but the correlations of price momentum for equity and derivatives in down market conditions are not necessarily higher. This is evidenced from the correlations between Singapore and Malaysia for both equity and equity derivative momentum investments and the correlations between Malaysia and Korea and between Taiwan and Japan in derivative momentum investing. In Exhibit 5(c) and Table 5(c), Exhibit 5(d) and Table 5(d), Exhibit 5(e) and Table 5(e), and Exhibit 5(f) and Table 5(f) for Hong Kong, Korea, Taiwan, and Japan, respectively, we observe the same outcome, that price momentum correlations for equity and derivatives are generally lower than the market return correlation when market indices move upward or downward.

Page 11 The price momentum correlations, however, for equity and equity derivatives under negative market conditions are not higher than the corresponding price momentum correlations when markets are in a positive regime. This is evidenced when the Hong Kong market experiences negative returns: The price momentum correlations for both equity and derivatives between Malaysia and Hong Kong and between Japan and Hong Kong are indeed lower than the corresponding correlations when the Hong Kong market is up. Also, the correlations between Korean and Singaporean equity and derivative momentum investing returns are both lower when the Korean market is down. Similarly, the correlations between Hong Kong and Japanese equity and derivative momentum investing returns are both lower when the Japanese market is down. Through these observations, we find evidence that while price momentum returns are no doubt relatively lower in up and down market conditions, they are not necessarily more highly correlated when the market experiences downside negative returns than during upside positive returns. Table 6 tabulates the data for the top five positive and negative correlations with all the market conditions, that is, all (raw) market returns, when the markets are trading upward and downward across the six selected countries. Top 5 Positive Correlations 1

2

3

4

Top 5 Negative Correlations 5

1

2

3

4

5

0.7251 0.6833 0.5480 0.5280 0.5203

-0.5927 -0.3100 -0.2138 -0.2116 -0.2014

Negative Market Returns 0.6046 0.5996 0.5764 0.4837 0.4540

-0.8234 -0.7796 -0.6257 -0.3779 -0.3772

Positive Market Returns 0.6370 0.6206 0.6148 0.5592 0.5536

-0.3449 -0.3447 -0.3299 -0.3072 -0.3034

Maximum

0.7251 0.6833 0.6370 0.6206 0.6148

-0.8234 -0.7796 -0.6257 -0.5927 -0.3779

Portfolio Average Annual Return

21.59% 40.97% 43.67% 31.35% 21.20%

0.58% 0.58% 5.98% 35.56% -7.79%

All Market Returns

Table 6: Top Five Positive and Negative Correlations

The top three correlations from Table 6 from portfolios comprising equities investing in Korea and Japan (0.7251 and 0.6833) and Singapore and Hong Kong (0.6370) are from investments in Japan and Korea when the Japanese market is up. The fourth highest positive correlation of 0.6206 is from the portfolio comprising Singaporean outright equities derivatives and momentum equities derivatives, when Singaporean market returns are positive.

Page 12 Undoubtedly, portfolio profit maximization is attained when combining investment in equities within or across Asian countries. Nonetheless, we also find evidence that applying momentum strategy can enhance profits under positive and negative market conditions. Our study also provides sufficient evidence that momentum strategies can minimize portfolio risk in both up and down market conditions. Most importantly, when the Asian markets experience a downturn, the application of momentum strategies plays a significant role in our portfolio diversification process. We note from Table 6 that the three most negative correlations are -0.8234 when the Singaporean market experiences negative returns from the portfolios comprising Singaporean equities and Korean equities derivatives momentum investments; 0.7796, when the Korean market is down, from combining Korean momentum equities derivatives and Singaporean momentum equities; and -0.6257, when the Singapore market index is down, from Singapore momentum equities derivatives and its outright equities derivatives investment. When Asian markets are down, with negative returns, momentum investing in down markets can bring in substantial positive returns, as shown in Exhibit 6 and Table 7. Across Asian countries, with the exception of Singapore equity positions, momentum investing in both equity and equity derivatives positions unanimously earns positive returns when Asian markets are down, with a substantial 11.75% return earned from momentum equity positions in the Japanese down market and a substantial 16.96% return earned from momentum equity derivatives investments when the Malaysia market is down.

IV.

CONCLUSION

This paper explores the feasibility of applying momentum strategies for both equity and equity derivatives investments across Asian countries. The inclusion of equity derivatives in a portfolio is not redundant and, by adding momentum equity derivatives, we create a well-diversified Asian portfolio with substantial positive returns. First, our results show that momentum profits are quite substantial across Asian countries for both equity and equity derivatives investments, with momentum strategies on equity derivatives positions providing much larger profits than equity momentum investments.

Page 13 Second, momentum investing, though generally perceived to be more volatile, is found, however, to be less volatile than outright investing in both equity and equity derivatives instruments. Third, there is a low correlation between equity momentum and equity derivative momentum investing. Fourth, correlations between equities investing are the highest across the Asian countries. Profit maximization is therefore best achieved by combining mainly equities in our Asian portfolio and a welldiversified Asian portfolio is best created when it comprises momentum investments. It is possible to achieve an efficient portfolio by creating a portfolio comprising momentum investing. Momentum investing is less correlated when Asian markets experience negative returns. Our findings are consistent with the results of Griffin, Ji, and Martin (2005), that momentum strategies do pay off under down market conditions. Investors using momentum strategies are better off than index fund investors when the market experiences negative returns across the six selected Asian countries. In an uptrend market, momentum equities investments experience lower returns compared to investments in equity markets. Equity derivatives investments, however, are better off than equity derivatives investments under both up and down market conditions across the six selected Asian countries.

Page 14 REFERENCES Aitken, M., Harris, F., McInish, T., and Segara, R., 2005, “Are Warrants Redundant? Spanning Tests and Price Discovery.” European Financial Management Association Conference Siena, Italy: Financial Management Association. Asness, C. S., 1997, “The Interaction of Value and Momentum Strategies.” Financial Analysts Journal, 53, No. 2, pp. 29-36. Barberis, N., Shleifer, A., and Vishny, R., 1998, “A Model of Investor Sentiment.” Journal of Financial Economics, 49, pp. 307-343. Chan, K., Hameed, A., and Tong, W., 2000, “Profitability of Momentum Strategies in the International Equity Markets.” Journal of Financial and Quantitative Analysis, 35, pp. 153-172. Chan, L. K. C., Narasimhan, J., and Lakonishok, J., 1996, “Momentum Strategies.” Journal of Finance, 51, No. 5, pp. 1681-1713. Chordia, T., and Shivakumar, L., 2000, “Momentum, Business Cycle and Time Varying Expected Returns.” Emory University, London Business School, London, working paper. Cleary, S., and Inglis, M., 1998, “Momentum in Canadian Stock Returns.” Canadian Journal of Administrative Science, 15, pp. 279-291. Connolly, R., and Stivers, C., 2003, “Momentum and Reversals in Equity-Index Returns During Periods of Abnormal Turnover and Return Dispersion.” Journal of Finance, 58, pp. 1521-1555. Cutler, D. M., Poterba, J. M., and Summers, L. H., 1991, “Speculative Dynamics.” Review of Economic Studies, 58, pp. 529-546. Daniel, K., Hirshleifer, D., and Subrahmanyam, A., 1998, “Investor Psychology and Security Market Under- and Overreactions.” Journal of Finance, 53, pp. 1839-1887. De Long, B. J., Shleifer, A., Summers, L. H., and Waldman R. J., 1990, “Positive Feedback Investment Strategies and Destabilizing Rational Speculation.” Journal of Finance, 45, pp. 379-395.

Page 15 Demir, I., Muthuswamy, J., and Walter, T., 2004, “Momentum Returns in Australian Equities: The Influences of Size, Risk, Liquidity and Return Computation.” PacificBasin Finance Journal, 12, pp. 143-158. Drew, M., Veeraraghavan, M., and Ye, M., 2004, “Do Momentum Strategies Work? Australian Evidence.” Queensland University of Technology, School of Economics and Finance, Brisbane, Discussion Paper No. 169. Ellis, M., and Dylan, T. C., 2004, “Momentum and the FTSE 350.” Journal of Asset Management, 5, pp. 25-36. Griffin, J. M., Ji, S., and Martin, J. S., 2003, “Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole.” Journal of Finance, 58, No. 6, pp. 25152547. Griffin, J. M., Ji, S., and Martin, J. S., 2005, “Global Momentum Strategies: A Portfolio Perspective.” Journal of Portfolio Management, 31, pp. 23-39. Grinblatt, M., Titman, S., and Wermers, R., 1995, “Momentum Investing Strategies, Portfolio Performance and Herding: A Study of Mutual Fund Behaviour.” American Economic Review, 85, pp. 1088-1105. Grundy, B. D., and Martin, J. S., 2001, “Understanding the Nature of the Risks and the Source of the Rewards to Momentum Investing.” Review of Financial Studies, 14, No. 1, pp. 29-78. Hameed, A., and Yuanto, K., 2000, “Momentum Strategies: Evidence From the Pacific Basin Stock Markets.” National University of Singapore, working paper. Hameed, A., and Kusnadi, K., 2002, “Momentum Strategies: Evidence From the Pacific Basin Stock Markets.” Journal of Financial Research, 25, pp. 383-397. Hogan, S., Jarrow, R., Teo, M., and Warachka, M., 2004, “Testing Market Efficiency Using Statistical Arbitrage With Applications to Momentum and Value Strategies.” Journal of Financial Economics, 73, pp. 525-565. Hong, H., and Stein, J. C., 1999, “A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets.” Journal of Finance, 54, pp. 2143-2184.

Page 16 Hong, H., Lim, T., and Stein, J. C., 2000, “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55, No. 1, pp. 265-295. Jegadeesh, N., 1990, “Evidence of Predictable Behavior of Security Returns.” Journal of Finance, 45, pp. 881-898. Jegadeesh, N., and Titman, S., 1993, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48, No. 1, pp. 65-91. Jegadeesh, N., and Titman, S., 2001, “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations.” Journal of Finance, 56, pp. 699-720. Kang, J., Liu, M. H., and Ni, S. X., 2002, “Contrarian and Momentum Strategies in the China Stock Market: 1993-2000.” Pacific-Basin Finance Journal, 10, pp. 243265. Korajczyk, R. A., and Sadka, R., 2004, “Are Momentum Profits Robust to Trading Costs?” Journal of Finance, 59, No. 3, pp. 1039-1082. Kremer, J., and Roenfeldt, R., 1993, “Warrant Pricing: Jump-Diffusion vs. BlackScholes.” Journal of Financial and Quantitative Analysis, 28, No. 2, pp. 255-272. Lamourex, C. G., and Lastrapes, W. D., 1994, “Endogenous Trading Volume and Momentum in Stock Return Volatility.” Journal of Business and Economics, 12, pp. 253-261. Lee, C. M. C., and Swaminathan, B., 2000, “Price Momentum and Trading Volume.” Journal of Finance, 55, No. 5, pp. 2017-2069. Lesmond, D. A., Schill, M. J., and Zhou, C. S., 2004, “The Illusory Nature of Momentum Profits.” Journal of Financial Economics, 71, pp. 349-380. Lim, K. G., and Terry, E., 2003, “The Valuation of Multiple Stock Warrants.” Journal of Futures Markets, 23, pp. 517-534. Liu, C., and Lee, Y., 2001, “Does Momentum Strategy Work Universally? Evidence From the Japanese Stock Market.” Asia-Pacific Financial Markets, 8, pp. 321-339.

Page 17 Liu, W., Strong, N., and Xu, X., 1999, “The Profitability of Momentum Investing.” Journal of Business Finance and Accounting 26, pp. 1043-1091. Menkhoff, L., and Schmidt, U., 2005, “The Use of Trading Strategies by Fund Managers: Some First Survey Evidence.” Applied Economics, Taylor and Francis Journals, Vol. 37(15), pp. 1719-1730. Naranjo, A., and Porter, B., 2004, “Cross-Country Co-Movement of Momentum Returns.” Working paper, University of Florida. Naughton, T., Truong, C., and Veeraraghavan, M., 2004, “Yes, Momentum Strategies Work!” Emerging Financial Markets and Services Conference, Sydney, Australia, May 28-29. O’Neal, E., 2000, “Industry Momentum and Sector Mutual Funds.” Analysts Journal, 56, pp. 37-49.

Financial

Rouwenhorst, K. G., 1998, “International Momentum Strategies.” Journal of Finance, 53, No. 1, pp. 276-284. Rouwenhorst, K. G., 1999, “Local Return Factors and Turnover in Emerging Stock Markets.” Journal of Finance, 54, pp. 1439-1464. Schiereck, D., DeBondt, W., and Weber, M., 1999, “Contrarian and Momentum Strategies in Germany.” Financial Analysts Journal, 55, pp. 104-116. Securities and Futures Commission Hong Kong, Research Department, 2006, “Hong Kong’s Derivative Warrant Market - Moving With Times Amid Rapid Developments in Other Warrants Markets in Asia.” Research Paper 28, 6.

Page 18

EXHIBIT 1-1 Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Return (Re) Illustrated below for the six countries, namely, Singapore, Malaysia, Hong Kong, Korea, Taiwan, and Japan, are the time series of momentum returns for the equity and equity derivatives, the equity derivatives return, and the market return on a daily basis, in percentages. The period of study for each country is from July 2006 to December 2006. Equity and Equity Derivatives Outright Returns and Momentum Returns (Singapore) 15.00%

10.00%

Return (%)

5.00%

0.00%

-5.00%

-10.00%

-15.00% 07/06

08/06

09/06

10/06

11/06

12/06

Date STI Return, Re

MRe

MRed

Red

Equity and Equity Derivatives Outright Returns and Momentum Returns (Malaysia)

10.00% 8.00% 6.00%

Return (%)

4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% 07/06

08/06

09/06

10/06 Date

KLCI Return, Re

MRe

MRed

Red

11/06

12/06

Page 19

EXHIBIT 1-2 Equity and Equity Derivatives Outright Returns and Momentum Returns (Hong Kong)

5.00% 4.00% 3.00%

Return (%)

2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% 07/06

08/06

09/06

10/06

11/06

12/06

Date HSI Return, Re

MRe

MRed

Red

Equity and Equity Derivatives Outright Returns and Momentum Returns (Korea) 5.00%

4.00%

3.00%

Return (%)

2.00%

1.00%

0.00%

-1.00% -2.00%

-3.00% 07/06

08/06

09/06

10/06 Date

KOSPI Return, Re

MRe

MRed

Red

11/06

12/06

Page 20

EXHIBIT 1-3 Equity and Equity Derivatives Outright Returns and Momentum Returns (Taiwan) 4.00%

3.00%

2.00%

Return (%)

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-4.00% 07/06

08/06

09/06

10/06

11/06

12/06

Date TWII Return, Re

MRe

MRed

Red

Equity and Equity Derivativ es Outright Returns and M omentum Returns (Japan) 4.00%

3.00%

2.00%

Return (%)

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-4.00% 07/06

08/06

09/06

10/06 Date

Nikkei225 Return, Re

MRe

MRed

Red

11/06

12/06

Page 21

EXHIBIT 2 Average Annualized Equity Price Momentum Return (MRe), Average Annualized Equity Derivatives Price Momentum Return (MRed), Average Annualized Market Return (Re), and Average Annualized Equity Derivatives Return (Red) Illustrated below for the six countries, namely, Singapore, Malaysia, Hong Kong, Korea, Taiwan, and Japan, are the average annual returns and average annual momentum return for both the equity and equity derivatives, in percentages. The period of study for each country is from July 2006 to December 2006.

Average Annualized Equity and Equity Derivative Momentum Returns, Average Annualized Equity Derivative Return, and Average Annualized Market Return by Countries

Japan

Countries

Taiwan Korea Hong Kong Malaysia Singapore 0%

20%

40%

60%

80%

100%

Average Annualized Daily Return (%) Re

MRe

MRed

Red

Country

Singapore

Malaysia

Hong Kong

Korea

Taiwan

Japan

Re

41.32%

35.36%

40.62%

21.74%

30.84%

21.44%

MRe

23.10%

21.22%

48.08%

32.07%

22.10%

46.01%

Red

73.79%

60.72%

52.37%

24.38%

35.19%

22.63%

MRed

97.92%

99.29%

60.30%

48.02%

20.26%

6.03%

Note: This table is with reference to Table 1(a).

Page 22

EXHIBIT 3 Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Return (Re) Illustrated below for Singapore are the correlations between the momentum return for the equity and (i) momentum return for the equity derivatives, i.e., ρ(MRe, MRed), (ii) market return, i.e., ρ(MRe, Re), and (iii) equity derivatives return, i.e., ρ(MRe, Red), respectively; the correlations between the momentum return for the equity derivatives return and (i) market return, i.e., ρ(MRed, MRe), and (ii) equity derivatives return, i.e., ρ(MRed, Red), respectively; and the correlation between the market return and the equity derivatives return, i.e., ρ(Re, Red), across countries. The period of study for each country is from July 2006 to December 2006.

Singapore

Malaysia Hong Kong

Korea

Taiwan

Japan

Correlation of Singapore Returns Versus That of Five Other Countries

Red MRed MRe Re Red MRed MRe Re Red MRed MRe Re Red MRed MRe Re Red MRed MRe Re Red MRed MRe Re -0.6000

-0.4000

-0.2000

Singapore Re

0.0000

Singapore MRe

0.2000

0.4000

Singapore MRed

0.6000

0.8000

Singapore Red

1.0000

Page 23 Table 3(a): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Return (Re) Across Countries (Raw Data) All Returns

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red 0.1957

0.0650

0.0582

0.1957

-0.0214

-0.0039

0.0650

-0.0214

Singapore-Malaysia

0.4279 0.0387

-0.0384

0.0338

0.0552

0.1270

-0.0704

0.1075

0.0100

0.0513

Singapore-Hong Kong

0.6833 0.0676

0.0645

0.1440

0.1065

0.1953

0.2142

0.0306

-0.0830

Singapore-Korea

0.5203 0.0110

-0.0499

0.1037

0.1411

-0.0232

-0.5927

0.0436

Singapore-Taiwan

0.4790 0.0294

0.0623

0.0278

0.1197

0.1491

-0.1841

Singapore-Japan

0.5480 -0.0309

0.1215

0.0330

0.0512

-0.0394

Maximum

0.6833 0.5480

0.5203

Minimum

-0.5927 -0.3100 -0.1841

Malaysia-Singapore

0.4279 0.0552

0.0897

0.0387

0.1270

Singapore-Singapore

Malaysia-Malaysia

0.0100

-0.1926 -0.0467 -0.1472 -0.1926

0.0389

0.0582

-0.0039

0.0389

0.1215

0.0484

0.0897

0.2576

0.0177

0.1313

0.0674

0.0515

0.3023

-0.0114 0.0929

-0.3100

0.3932

-0.0845

0.0651

-0.0160

0.0617

-0.0257 0.1087

-0.0361

0.0269

-0.0333

-0.0239

0.0802

0.0580

0.0194

-0.0562 0.1057

0.0058

-0.0886

0.0173

-0.0157

-0.0440

0.0706

0.0246

0.0133

0.0521

-0.0737

0.0915

0.1514

0.0513

0.2576

-0.0384

-0.0704

0.1215

0.0177

0.0338

0.1075

0.0484

0.1313

0.0700

0.1403

-0.0467

0.0700

0.0252

-0.1472 0.1403

0.0252

Malaysia-Hong Kong

0.4017 -0.0360

0.0255

0.0780 -0.0743

-0.0525

-0.0137

0.1514

0.0345

-0.0778

-0.1212

0.1211

-0.0969 0.0977

0.0172

0.0666

Malaysia-Korea

0.3041 -0.2014

0.1243

0.1194

0.0196

0.0618

-0.0994

0.1537

-0.0623

0.0711

0.0914

-0.0346

0.1099

0.1085

-0.0164

-0.0397

Malaysia-Taiwan

0.4099 0.0777

0.0270

-0.0346 -0.1018

-0.0405

-0.1316

0.1134

-0.0377

0.0439

-0.0317

0.0261

-0.0313 0.0821

-0.1037

0.1518

Malaysia-Japan

0.2433 0.1189

0.0704

0.1164 -0.0546

0.0029

0.0527

-0.0161

0.0174

0.0020

0.0023

-0.0233

0.0644

0.1292

0.0386

0.1671

Maximum

0.4279 0.4099

0.4017

Minimum

-0.2014 -0.1926 -0.1472

Hong Kong-Singapore

0.6833 0.1065

-0.0830 -0.0114 0.0676

0.1953

0.0674

0.0929

0.0645

0.2142

0.0515

-0.3100

0.1440

0.0306

0.3023

0.3932

Hong Kong-Malaysia

0.4017 -0.0743

0.0345

-0.0969 -0.0360

-0.0525

-0.0778

0.0977

0.0255

-0.0137

-0.1212

0.0172

0.0780

0.1514

0.1211

0.0666

0.0187

0.0204

0.0994

0.0662

0.1019

0.0204

0.0662

-0.2138

0.0994

0.1019

-0.2138

Hong Kong-Korea

0.4966 0.0111

0.0069

0.1340 -0.0650

-0.0192

-0.1828

0.0108

0.0877

-0.0440

-0.1458

-0.0090

0.1052

0.0645

-0.0653

0.0438

Hong Kong-Taiwan

0.5037 -0.0296

0.1414

-0.0659 -0.0684

-0.0505

-0.0936

0.0777

0.0508

0.0838

-0.0854

-0.0966

0.0738

0.0918

-0.0221

0.2184

Hong Kong-Japan

0.4914 -0.0659

0.1526

0.0302

-0.0738

0.1474

-0.0172

0.0236

-0.0483

0.0790

-0.2116

0.2094

-0.0500

-0.0040

0.0529

Maximum

0.6833 0.5037

0.4966

Minimum

-0.3100 -0.2138 -0.2116

Hong Kong-Hong Kong

0.0187

0.0557

Page 24 Table 3(a): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Return (Re) Across Countries (Raw Data) All Returns

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red

Korea-Singapore

0.5203 0.1411

-0.0845 -0.0257 0.0110

-0.0232

0.0651

0.1087

-0.0499

-0.5927

-0.0160

-0.0361

0.1037

0.0436

0.0617

0.0269

Korea-Malaysia

0.3041 0.0196

-0.0623

0.1099 -0.2014

0.0618

0.0711

0.1085

0.1243

-0.0994

0.0914

-0.0164

0.1194

0.1537

-0.0346

-0.0397

Korea-Hong Kong

0.4966 -0.0650

0.0877

0.1052

-0.0192

-0.0440

0.0645

0.0069

-0.1828

-0.1458

-0.0653

0.1340

0.0108

-0.0090

0.0438

-0.0702

0.0093

0.2005 -0.0702

0.0039

-0.0765

0.0093

0.0039

0.1667

0.2005

-0.0765

0.1667

Korea-Taiwan

0.5280 -0.1520

0.0900

0.0828 -0.0076

-0.0191

0.2019

-0.0310

-0.0886

-0.0119

0.1821

-0.0248

0.0496

0.2095

-0.1041

0.1585

Korea-Japan

0.7251 -0.0884

0.1303

-0.0440 0.0779

0.1490

0.0376

0.0043

0.0090

0.0238

-0.0327

-0.0241

0.1496

-0.0780

0.0315

0.2534

Maximum

0.7251 0.5280

0.5203

Minimum

-0.5927 -0.2014 -0.1828

Taiwan-Singapore

0.4790 0.1197

-0.0239 -0.0562 0.0294

0.1491

0.0802

0.1057

0.0623

-0.1841

0.0580

0.0058

0.0278

-0.0333

0.0194

-0.0886

Taiwan-Malaysia

0.4099 -0.1018

-0.0377 -0.0313 0.0777

-0.0405

0.0439

0.0821

0.0270

-0.1316

-0.0317

-0.1037

-0.0346 0.1134

0.0261

0.1518

Taiwan-Hong Kong

0.5037 -0.0684

0.0508

0.0738 -0.0296

-0.0505

0.0838

0.0918

0.1414

-0.0936

-0.0854

-0.0221

-0.0659 0.0777

-0.0966

0.2184

Taiwan-Korea

0.5280 -0.0076

-0.0886

0.0496 -0.1520

-0.0191

-0.0119

0.2095

0.0900

0.2019

0.1821

-0.1041

0.0828

-0.0310

-0.0248

0.1585

0.0276

0.0393

0.0566

-0.0407

0.0330

0.0393

-0.0407

-0.0589

0.0566

0.0330

-0.0589

Taiwan-Japan

0.4958 -0.0581

0.0765

-0.0153 0.0358

0.0913

-0.1829

0.0936

0.0800

0.0412

-0.0051

0.0441

0.1383

0.0054

0.0286

0.1147

Maximum

0.5280 0.5037

0.4958

Minimum

-0.1841 -0.1829 -0.1520

Japan-Singapore

0.5480 0.0512

-0.0440

0.0521 -0.0309

-0.0394

0.0706

-0.0737

0.1215

0.0173

0.0246

0.0915

0.0330

-0.0157

0.0133

0.1514

Japan-Malaysia

0.2433 -0.0546

0.0174

0.0644

0.1189

0.0029

0.0020

0.1292

0.0704

0.0527

0.0023

0.0386

0.1164

-0.0161

-0.0233

0.1671

Japan-Hong Kong

0.4914 0.0557

0.0236

0.2094 -0.0659

-0.0738

-0.0483

-0.0500

0.1526

0.1474

0.0790

-0.0040

0.0302

-0.0172

-0.2116

0.0529

Japan-Korea

0.7251 0.0779

0.0090

0.1496 -0.0884

0.1490

0.0238

-0.0780

0.1303

0.0376

-0.0327

0.0315

-0.0440 0.0043

-0.0241

0.2534

Japan-Taiwan

0.4958 0.0358

0.0800

0.1383 -0.0581

0.0913

0.0412

0.0054

0.0765

-0.1829

-0.0051

0.0286

-0.0153 0.0936

0.0441

0.1147

-0.1039

0.0803

0.0698 -0.1039

-0.0209

-0.0286

0.0803

-0.0209

0.0146

0.0698

0.0146

Maximum

0.7251 0.5480

0.4958

Minimum

-0.2116 -0.1829 -0.1039

Overall Maximum

0.7251 0.6833

Overall Minimum

-0.5927 -0.3100 -0.2138 -0.2116 -0.2014

Korea-Korea

Taiwan-Taiwan

Japan-Japan

0.5480

0.0111

0.0276

0.5280 0.5203

-0.0286

Page 25 Table 3(b): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Negative Return (Re) Across Countries Negative Market Singapore-Singapore

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red 0.1953

-0.0617

0.0870 0.1953

-0.0072

0.0111

-0.0617

-0.0072

-0.6257

0.0870

0.0111

-0.6257

Singapore-Malaysia

0.5996 0.0875

-0.0621 -0.1609 -0.0295

0.2702

-0.1801

0.1104

0.0390

-0.2087

0.0832

-0.0283

0.1840

0.3104

-0.0266

0.1055

Singapore-Hong Kong

0.6046 -0.1313

0.2503

0.1757 0.0388

0.2158

0.3539

-0.0101

-0.0578

-0.0114

0.3017

-0.0739

0.0144

0.1348

-0.3772

0.2851

Singapore-Korea

0.4321 -0.0324

-0.0537

0.2402 0.2213

-0.0562

-0.8234

-0.0419

0.0762

-0.1186

-0.0637

-0.0733

-0.0250

0.1042

-0.0508

0.1311

Singapore-Taiwan

0.3607 0.3016

-0.0661 -0.0874 0.1083

0.1595

-0.3418

-0.1912

0.0477

-0.0920

0.0744

0.2807

0.0054

0.1806

-0.0438

-0.1410

Singapore-Japan

0.4088 0.0935

0.0254

0.0207 -0.0159

-0.1118

0.0070

-0.0858

-0.1820

0.1646

-0.0335

-0.0426

0.0481

-0.2121

0.1239

0.1901

Maximum

0.6046 0.5996

0.4321

Minimum

-0.8234 -0.6257 -0.3772

Malaysia-Singapore

0.3710 -0.0187

-0.0548 -0.0224 0.0540

-0.0040

0.0356

-0.0773

0.0539

0.1352

0.1104

0.0976

0.0051

-0.0679

0.1133

0.3498

0.0812

-0.0627 -0.1955 0.0812

-0.1029

0.1803

-0.0627

-0.1029

0.0257

-0.1955

0.1803

0.0257

Malaysia-Malaysia Malaysia-Hong Kong

0.2564 -0.0583

0.2214

-0.0377 -0.0045

-0.1312

0.1698

-0.0839

0.1155

-0.0861

-0.0578

0.0591

-0.1978 -0.1158

0.1070

-0.0384

Malaysia-Korea

0.1964 -0.2442

0.1057

0.1457 -0.0953

0.1588

0.1879

0.2849

0.0648

-0.0597

0.0564

-0.1598

0.2432

-0.0696

0.1557

-0.0423

Malaysia-Taiwan

0.3455 -0.0137 -0.2813 -0.1144 -0.0269

0.0999

-0.2898

0.1424

-0.0034

0.1050

-0.0788

0.0460

0.0741

0.2779

-0.1529

0.1588

Malaysia-Japan

0.1437 -0.0577

0.2324

-0.0531 -0.1541

0.1765

0.0340

-0.0278

0.0813

-0.0053

0.0020

-0.1764

0.2278

0.1904

-0.0913

0.2065

Maximum

0.3710 0.3498

0.3455

Minimum

-0.2898 -0.2813 -0.2442

Hong Kong-Singapore

0.4837 -0.0642 -0.1542

0.0995 -0.0691

0.2365

0.0076

0.0685

0.2148

0.3353

0.1651

-0.3708

0.2477

0.0476

-0.0162

0.2450

Hong Kong-Malaysia

0.4540 0.0997

-0.3779 -0.0757

-0.1903

-0.1586

0.0176

0.1587

0.1838

-0.1860

-0.0285

0.0488

-0.0282

0.0606

0.1129

0.0073

-0.0617

0.0675

0.2640 -0.0617

0.2418

0.1330

0.0675

0.2418

-0.1534

0.2640

0.1330

-0.1534

Hong Kong-Korea

0.2488 -0.0942

0.0944

0.1448 0.0278

-0.2551

-0.2749

0.2518

0.3659

-0.3029

-0.2084

-0.0773

0.1927

0.0354

-0.1256

0.2170

Hong Kong-Taiwan

0.2544 -0.0251

0.1281

-0.2155 -0.1608

0.0752

-0.1665

0.1981

0.0560

-0.1066

-0.2487

0.1433

0.1498

0.1111

-0.1538

0.2592

Hong Kong-Japan

0.1379 -0.1108

0.1389

-0.0822 0.0687

-0.2337

0.1390

-0.1152

0.1323

-0.1687

-0.0944

-0.1716

0.2700

-0.0625

-0.1073

-0.0067

Maximum

0.4837 0.4540

0.3659

Minimum

-0.3779 -0.3708 -0.3029

Hong Kong-Hong Kong

Page 26 Table 3(b): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Negative Return (Re) Across Countries Negative Market

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red

Korea-Singapore

0.1863 0.1525

0.0859

0.0166 -0.0293

-0.0562

0.0106

0.1278

-0.1556

-0.7796

-0.0481

-0.0384

0.1149

0.0082

0.0581

0.1548

Korea-Malaysia

0.3096 -0.0547

-0.1499

0.1497 -0.3406

0.1447

0.0848

0.0110

0.0223

-0.1477

0.0813

-0.1155

0.1839

0.1926

-0.1267

0.0250

Korea-Hong Kong

0.2037 -0.0435

0.2704

0.2193 -0.0243

-0.0308

-0.2237

-0.0484

-0.0212

-0.2137

-0.1308

-0.1407

0.1137

0.1886

-0.0304

0.2213

-0.2582

-0.2121

0.1720 -0.2582

0.0996

-0.1203

-0.2121

0.0996

0.0716

0.1720

-0.1203

0.0716

Korea-Taiwan

0.2743 0.1192

-0.1113

0.1362 -0.0269

-0.0366

0.3343

0.0071

-0.1090

-0.0931

0.3248

0.0328

0.1643

0.2443

-0.0725

0.2454

Korea-Japan

0.4382 -0.1449

0.0420

0.1445 0.0153

0.1259

0.1327

0.0175

-0.0655

0.0125

0.0398

-0.1292

0.1613

-0.0023

-0.0475

0.2285

Maximum

0.4382 0.3343

0.3248

Minimum

-0.7796 -0.3406 -0.2582

Taiwan-Singapore

0.2501 0.0005

0.0696

-0.0113 0.2098

0.1799

0.0424

0.2061

-0.0444

-0.2743

0.0709

0.0228

-0.1295 -0.1030

0.0065

-0.2247

Taiwan-Malaysia

0.2812 0.0915

0.0383

0.0030 0.0655

0.0779

0.0429

0.1734

0.0094

-0.1925

0.0043

-0.1529

-0.0473

0.0351

0.1124

0.1008

Taiwan-Hong Kong

0.2886 -0.0423

-0.0078

0.0614 0.0686

0.1817

-0.0325

0.0700

0.1965

-0.1543

-0.2761

0.0050

-0.1226

0.0885

-0.1279

0.1430

Taiwan-Korea

0.2679 0.0180

-0.0077

0.2177 -0.1715

0.0038

0.0213

0.1829

0.0223

0.3301

0.2851

0.0052

0.1277

0.0290

0.0310

0.0924

-0.0024

-0.0856

0.1652 -0.0024

-0.1756

-0.0103

-0.0856

-0.1756

-0.0330

0.1652

-0.0103

-0.0330

-0.0276

-0.1127

0.2089

-0.0013

0.2001

0.0736

0.1600

0.1380

0.0962

-0.0126

0.1426

Korea-Korea

Taiwan-Taiwan Taiwan-Japan

0.0799 -0.0494

-0.0582 -0.0034 0.0499

Maximum

0.3301 0.2886

0.2851

Minimum

-0.2761 -0.2743 -0.2247

Japan-Singapore

0.3073 -0.0755

-0.0813

0.2575 0.1277

-0.0296

0.1509

-0.1920

0.0326

0.0765

0.0693

0.1485

0.1784

-0.0372

-0.0116

0.1814

Japan-Malaysia

0.2071 0.1274

-0.0786

0.2439 0.1463

-0.0074

0.0505

0.0235

0.0960

-0.0206

0.0393

0.1585

0.2287

-0.0741

0.0472

0.2013

Japan-Hong Kong

0.2607 -0.0213

-0.0185

0.2263 0.1135

-0.0970

-0.1200

0.0085

0.1405

0.0529

0.0130

0.0856

-0.0369 -0.0609

-0.2769

0.1510

Japan-Korea

0.5764 0.1215

0.0440

0.0756 0.0817

0.2445

-0.0862

0.0389

0.0601

0.1524

-0.0643

-0.0174

0.1922

0.0211

0.0201

0.1462

Japan-Taiwan

0.1403 0.0412

0.1615

0.2117 0.1505

-0.0974

0.2225

0.1030

-0.0220

-0.0228

0.0265

0.0796

0.0131

0.0267

0.0940

-0.0396

0.0783

0.1460

0.3610 0.0783

0.0609

-0.0171

0.1460

0.0609

-0.0131

0.3610

-0.0171

-0.0131

Maximum

0.5764 0.3610

0.3073

Minimum

-0.2769 -0.1920 -0.1200

Overall Max

0.6046 0.5996

Overall Min

-0.8234 -0.7796 -0.6257 -0.3779 -0.3772

Japan-Japan

0.5764

0.4837 0.4540

Page 27 Table 3(c): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Positive Return (Re) Across Countries Positive Market

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red 0.1410

-0.0317 -0.0652 0.1410

Singapore-Malaysia

0.2646 -0.0556

-0.0472 -0.1090 0.1886

Singapore-Hong Kong

0.5385 0.0102

-0.0632

0.1218

Singapore-Korea

0.3697 -0.0038

Singapore-Taiwan

0.6206

-0.0652 -0.1028

0.6206

0.1411

0.0611

-0.0519

0.2170

0.0670

0.1583

0.1127

-0.0965

0.4360

-0.1226 -0.0116

-0.2336

0.5536

-0.2235

0.1443

0.0373

0.1116

-0.0842

0.1235

0.0036

-0.0495

0.2441

-0.1186

0.1927

0.0388

-0.1183

-0.1809

0.0380

0.0544

-0.0519

-0.0038

0.0900

-0.0716

0.0292

0.0371

0.0258

0.0155

0.0981

0.0403

0.1129

0.0627

0.3480

-0.0819

-0.1133

0.1387

0.0033

0.0873

0.1471

0.0480

0.0895

0.1270

0.1225

-0.0208

0.1270

0.0228

-0.1425

0.1225

0.0228

-0.1143

-0.1028

-0.0317

-0.1143

-0.1377

0.1052

0.1002

-0.0473

0.1713

0.1218

0.0849

-0.0733

0.0934

-0.2175

0.1242

0.1734 -0.0294

0.0176

0.0750

0.2233

0.4043 0.0913

0.0672

-0.0502 0.0869

0.2635

0.0208

Singapore-Japan

0.3560 -0.0931

0.0785

-0.1059 0.0245

0.1298

Maximum

0.6206 0.5536

0.5385

Minimum

-0.2336 -0.2235 -0.2175

Malaysia-Singapore

0.1785 0.1504

-0.0412 -0.0221 0.1124

0.1425

Singapore-Singapore

Malaysia-Malaysia

-0.2429 -0.0208 -0.1425 -0.2429

Malaysia-Hong Kong

0.3067 -0.0143

Malaysia-Korea

0.0032 -0.0563

-0.0346

-0.0816

0.2501

0.0010

-0.0759

-0.1551

0.1564

-0.0147

0.1883

-0.0318

0.1255

0.1574 -0.1968 -0.0078

0.1810

0.1187

0.0147

-0.1432

0.1068

-0.1289

0.1409

0.1129

0.0516

0.0564

0.2051

-0.0659

-0.0382

Malaysia-Taiwan

0.2868 0.1236

-0.1401

0.0125 -0.0822

-0.0783

-0.0318

0.1044

-0.0426

0.0183

0.0086

0.0148

-0.0612 -0.0044

-0.0582

0.1472

Malaysia-Japan

0.0981 0.0912

-0.0968

0.0948

0.0143

-0.0449

0.0763

0.0114

-0.0011

0.0135

0.0052

0.0725

0.0063

0.1040

0.1339

0.1564

Maximum

0.3480 0.3067

0.2868

Minimum

-0.2429 -0.1968 -0.1551

Hong Kong-Singapore

0.4831 0.0120

-0.0564

0.0104

0.1526

0.0200

0.1496

0.1620

-0.0734

0.0453

-0.0331

-0.2666

0.1438

0.0320

0.5105

0.6148

Hong Kong-Malaysia

0.1703 0.0015

0.1469

-0.0640 -0.0482

0.0851

0.0018

0.1864

-0.0917

-0.1141

-0.0805

0.0461

0.1108

0.2319

0.1515

0.0419

-0.0811

-0.0583

0.1139 -0.0811

-0.1248

0.0880

-0.0583

-0.1248

-0.2478

0.1139

0.0880

-0.2478

Hong Kong-Korea

0.3837 0.0601

-0.0602

0.0768 -0.2436

0.2411

-0.0125

-0.1820

-0.0790

0.1312

-0.0862

0.0171

0.0860

0.0821

-0.0173

-0.0195

Hong Kong-Taiwan

0.3782 -0.1493

0.0923

-0.0199 -0.0671

-0.1662

-0.0264

-0.0298

0.0313

0.1742

0.0310

-0.2373

0.0526

0.0855

0.0625

0.1984

Hong Kong-Japan

0.3596 -0.2630

0.1379

-0.0339 -0.0198

0.0885

0.1572

0.0762

-0.0574

0.0303

0.1763

-0.2453

0.2248

-0.0417

0.0481

0.0899

Maximum

0.6148 0.5105

0.4831

Minimum

-0.2666 -0.2630 -0.2478

Hong Kong-Hong Kong

-0.0648

Page 28 Table 3(c): Correlation Between Equity Price Momentum Return (MRe), Equity Derivatives Price Momentum Return (MRed), Equity Derivatives Return (Red), and Market Positive Return (Re) Across Countries Positive Market

Re,Re Re,MRe Re,MRed Re,Red MRe,Re MRe,MRe MRe,MRed MRe,Red MRed,Re MRed,MRe MRed,MRed MRed,Red Red,Re Red,MRe Red,MRed Red,Red

Korea-Singapore

0.3902 0.0153

-0.2233 -0.3449 0.0839

0.0815

0.1170

0.0887

-0.0403

-0.0034

0.0328

-0.0631

0.1061

0.1522

0.0663

-0.1197

Korea-Malaysia

0.0038 -0.0296

-0.0740 -0.1041 -0.0584

-0.0036

0.0560

0.1831

0.2171

-0.0688

0.1086

0.0318

0.0740

0.1312

0.0337

-0.0743

Korea-Hong Kong

0.4666 -0.3034

0.0690

-0.1675 0.0686

-0.0004

0.1305

0.1488

-0.0646

-0.1391

-0.1725

-0.0485

0.1617

-0.1715

0.0053

-0.0410

0.0255

-0.0211

0.3314

-0.1327

-0.0475

-0.0211

-0.1327

0.2802

0.3314

-0.0475

0.2802

Korea-Taiwan

0.3340 -0.1271

0.0548

-0.0310 0.0267

-0.0058

0.0884

-0.0646

-0.2334

0.1697

-0.0154

-0.1224

-0.0403

0.2079

-0.1310

0.1043

Korea-Japan

0.5592 -0.2338

0.2007

-0.0379 0.1930

0.1719

-0.0791

-0.0106

-0.0812

0.0254

-0.1808

0.1355

0.1783

-0.1216

0.0980

0.2785

Maximum

0.5592 0.4666

0.3902

Minimum

-0.3449 -0.3034 -0.2338

Taiwan-Singapore

0.4352 0.0830

-0.0478 -0.1529 -0.1785

0.1574

0.1500

-0.0448

0.1576

0.0408

0.0466

-0.0259

0.1719

0.1736

0.0480

0.1544

Taiwan-Malaysia

0.1622 -0.1039

-0.0438 -0.0418 0.0737

-0.1230

0.0479

0.0002

-0.0003

-0.0613

-0.0598

-0.0426

-0.0593

0.1907

-0.0346

0.2053

Taiwan-Hong Kong

0.4372 0.0933

0.1184

-0.0600 -0.1603

-0.3299

0.1944

0.1085

0.0414

0.0171

0.1478

-0.0707

-0.0525

0.0768

-0.0664

0.2951

Taiwan-Korea

0.5014 0.0772

-0.1857 -0.0553 -0.1890

-0.0367

-0.0497

0.2287

0.1225

0.0592

0.0266

-0.1999

0.0272

-0.0867

-0.0965

0.2066

0.0967

0.0687

0.0958

0.0967

-0.0949

-0.1039

0.0687

-0.0949

Korea-Korea

0.0255

0.0051

0.0958

-0.1039 0.0051

Taiwan-Japan

0.5267 -0.3072

0.1879

0.0335

Maximum

0.5267 0.5014

0.4372

Minimum

-0.3299 -0.3072 -0.2503

Japan-Singapore

Taiwan-Taiwan

0.0079

0.2197

-0.2503

-0.0095

0.1121

-0.1947

-0.1031

-0.0889

0.1346

-0.1089

0.0643

0.0900

0.4086 0.0266

-0.0830 -0.1423 -0.1849

-0.0567

-0.0145

0.1205

0.2519

-0.2233

-0.0281

-0.0051

-0.1531

0.0522

0.0389

0.1160

Japan-Malaysia

0.2564 -0.1741

-0.0790 -0.1811 0.1121

0.0059

-0.0364

0.2295

0.0275

0.1346

-0.0495

-0.0674

0.0013

0.0367

-0.0937

0.1472

Japan-Hong Kong

0.5010 -0.0961

0.0398

0.0492 -0.2312

-0.0148

0.0564

-0.0739

0.1529

0.3222

0.1762

-0.0949

0.1223

0.0571

-0.1316

-0.0142

Japan-Korea

0.6370 0.1767

-0.1089

0.1333 -0.1903

0.0426

0.2224

-0.1645

0.1915

-0.0921

0.0206

0.0675

-0.2589 -0.0133

-0.0975

0.3456

Japan-Taiwan

0.5425 -0.1255

0.1171

-0.1700 -0.2202

0.2721

-0.1570

-0.0759

0.1596

-0.3447

-0.0402

-0.0475

-0.0356

0.1515

-0.0068

0.2836

-0.1073

-0.0424

-0.0082

-0.1073

0.0456

-0.0943 -0.0424

0.0456

Japan-Japan

-0.2105

-0.0082 -0.0943 -0.2105

Maximum

0.6370 0.5425

0.5010

Minimum

-0.3447 -0.2589 -0.2312

Overall Max

0.6370 0.6206

Overall Min

-0.3449 -0.3447 -0.3299 -0.3072 -0.3034

0.6148

0.5592 0.5536

Page 29

EXHIBIT 4-1 Correlations of Equity and Equity Derivatives Momentum Returns and Equity Derivative Returns Versus Market Index Return Correlation (a)

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Singapore market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line.

Momentum Returns Correlation and Equity Derivatives Return

Equity & Equity Derivatives Mom e ntum Returns Correlation vs Marke t Return Correlation (Singapore)

0.8000 0.6000 0.4000 0.2000 0.0000 0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

-0.2000 Mark et Return Correlation Singapo re M Re,M Re (Y1)

Sing apore M Red ,M Red (Y2 )

Sing apore Red,Red (Y3)

Table 4(a)

Singapore ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Korea 0.5203 -0.0232 -0.0160 0.0269

Taiwan 0.4790 0.1491 0.0580 -0.0886

Japan 0.5480 -0.0394 0.0246 0.1514

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Malaysia market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line. Equity & Equity Derivatives Mom e ntum Returns Correlation vs Market Re turn Correlation (Malaysia)

0.5000 Momentum Returns Correlation and Equity Derivatives Return

(b)

Malaysia Hong Kong 0.4279 0.6833 0.1270 0.1953 0.1215 0.0515 0.1313 0.3932

0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

-0.2000 Market Return Corre lation M alaysia M Re,M Re (Y1)

M alaysia M Red,M Red (Y2)

M alaysia Red ,Red (Y3 )

Table 4(b)

Malaysia ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore Hong Kong 0.4279 0.4017 0.1270 -0.0525 0.1215 -0.1212 0.1313 0.0666

Korea 0.3041 0.0618 0.0914 -0.0397

Taiwan 0.4099 -0.0405 -0.0317 0.1518

Japan 0.2433 0.0029 0.0023 0.1671

Page 30

EXHIBIT 4-2 (c)

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Hong Kong market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line. Equity & Equity Derivative s Mom entum Returns Correlation vs Marke t Return Correlation (Hong Kong)

Momentum Returns Correlation and Equity Derivatives Return

0.8000 0.6000 0.4000 0.2000 0.0000 0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

-0.2000 Mark et Re turn Correlation Ho ng Kong M Re,M Re (Y1)

Ho ng Kong M Red,M Red (Y2 )

Hong Kong Red,Red (Y3)

Table 4(c)

Hong Kong ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Malaysia 0.4017 -0.0525 -0.1212 0.0666

Korea 0.4966 -0.0192 -0.1458 0.0438

Taiwan 0.5037 -0.0505 -0.0854 0.2184

Japan 0.4914 -0.0738 0.0790 0.0529

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Korea market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line. Equity & Equity Derivatives Mom e ntum Returns Correlation vs Market Return Correlation (Korea)

0.8000 Momentum Returns Correlation and Equity Derivatives Return

(d)

Singapore 0.6833 0.1953 0.0515 0.3932

0.6000 0.4000 0.2000 0.0000 0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

-0.2000 Market Return Corre lation Korea M Re,M Re (Y1)

Ko rea M Red,M Red (Y2 )

Korea Red,Red (Y3)

Table 4(d)

Korea ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore 0.5203 -0.0232 -0.0160 0.0269

Malaysia Hong Kong 0.3041 0.4966 0.0618 -0.0192 0.0914 -0.1458 -0.0397 0.0438

Taiwan 0.5280 -0.0191 0.1821 0.1585

Japan 0.7251 0.1490 -0.0327 0.2534

Page 31

EXHIBIT 4-3 (e)

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Taiwan market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line. Equity & Equity Derivative s Mom entum Returns Correlation vs Market Return Corre lation (Taiw an)

Momentum Returns Correlation and Equity Derivatives Return

0.6000

0.4000

0.2000

0.0000 0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

-0.2000 Mark et Re turn Correlation Taiwan M Re,M Re (Y1)

Taiwan M Red,M Red (Y2)

Taiwan Red ,Red (Y3 )

Table 4(e)

Taiwan ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Malaysia Hong Kong 0.4099 0.5037 -0.0405 -0.0505 -0.0317 -0.0854 0.1518 0.2184

Korea 0.5280 -0.0191 0.1821 0.1585

Japan 0.4958 0.0913 -0.0051 0.1147

Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Japan market return plotted on the x axis. That the correlations of the momentum returns are equal to the correlation of the market return is demonstrated by the 45-degree straight line. Equity & Equity Derivatives Mom e ntum Returns Correlation vs Market Return Correlation (Japan)

0.8000 Momentum Returns Correlation and Equity Derivatives Return

(f)

Singapore 0.4790 0.1491 0.0580 -0.0886

0.6000 0.4000 0.2000 0.0000 0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

-0.2000 Market Return Corre lation Japan M Re,M Re (Y1)

Japan M Red ,M Red (Y2)

Japan Red ,Red (Y3 )

Table 4(f)

Japan ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore 0.5480 -0.0394 0.0246 0.1514

Malaysia Hong Kong 0.2433 0.4914 0.0029 -0.0738 0.0023 0.0790 0.1671 0.0529

Korea 0.7251 0.1490 -0.0327 0.2534

Taiwan 0.4958 0.0913 -0.0051 0.1147

Page 32

EXHIBIT 5-1 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Singapore market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Singapore)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Singapore)

Momentum Returns Correlation and Equity Derivatives Return

0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

Momentum Returns Correlation and Equity Derivatives Return

(a)

0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 -0.1000 0.0000

0.1000

0.3000

0.4000

0.5000

0.6000

Market Return Correlation Singapore MRed,MRed (Y2)

Singapore MRe,MRe (Y1)

Singapore MRed,MRed (Y2)

Singapore Red,Red (Y3)

Singapore Red,Red (Y3)

Table 5(a) Singapore ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

0.7000

Market Return Correlation

-0.2000

Singapore MRe,MRe (Y1)

0.2000

-0.2000

(i) Positive Market Returns Malaysia Hong Kong Korea Taiwan 0.2646 0.5385 0.3697 0.4043 -0.1377 0.0849 0.0176 0.2635 0.1411 -0.0965 0.0373 0.0388 0.1583 0.5536 -0.0495 -0.0519

Japan 0.3560 0.1298 0.0371 0.1129

Malaysia 0.5996 0.2702 0.0832 0.1055

(ii) Negative Market Returns Hong Kong Korea Taiwan 0.6046 0.4321 0.3607 0.2158 -0.0562 0.1595 0.3017 -0.0637 0.0744 0.2851 0.1311 -0.1410

Japan 0.4088 -0.1118 -0.0335 0.1901

Page 33

EXHIBIT 5-2 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Malaysia market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Malaysia)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Malaysia)

0.4000

Momentum Returns Correlation and Equity Derivatives Return

0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0.3500

0.4000

Momentum Returns Correlation and Equity Derivatives Return

(b)

-0.2000

0.3000 0.2000 0.1000 0.0000 0.0000

0.0500

0.1000

0.2000

0.2500

0.3000

0.3500

Malaysia MRed,MRed (Y2)

Market Return Correlation

Malaysia Red,Red (Y3)

Malaysia MRe,MRe (Y1)

Malaysia MRed,MRed (Y2)

Malaysia Red,Red (Y3)

Table 5(b) Malaysia ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

0.4000

-0.2000 Market Return Correlation

Malaysia MRe,MRe (Y1)

0.1500

-0.1000

(i) Positive Market Returns Singapore Hong Kong Korea Taiwan 0.1785 0.3067 0.1574 0.2868 0.1425 -0.0346 0.0147 -0.0783 0.1387 -0.1551 0.1129 0.0086 0.0895 0.1255 -0.0382 0.1472

Japan 0.0981 -0.0449 0.0052 0.1564

(ii) Negative Market Returns Singapore Hong Kong Korea Taiwan 0.3710 0.2564 0.1964 0.3455 -0.0040 -0.1312 0.1588 0.0999 0.1104 -0.0578 0.0564 -0.0788 0.3498 -0.0384 -0.0423 0.1588

Japan 0.1437 0.1765 0.0020 0.2065

Page 34

EXHIBIT 5-3 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Hong Kong market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Hong Kong)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Hong Kong)

0.7000

Momentum Returns Correlation and Equity Derivatives Return

0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

-0.2000 -0.3000

Momentum Returns Correlation and Equity Derivatives Return

(c)

-0.4000

0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.3000

0.4000

0.5000

0.6000

-0.4000

Hong Kong MRed,MRed (Y2)

Market Return Correlation Hong Kong MRe,MRe (Y1)

Hong Kong Red,Red (Y3)

Hong Kong MRed,MRed (Y2)

Hong Kong Red,Red (Y3)

Table 5(c) Hong Kong ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

0.7000

-0.3000

Market Return Correlation Hong Kong MRe,MRe (Y1)

0.2000

-0.2000

Singapore 0.4831 0.0200 -0.0331 0.6148

(i) Positive Market Returns Malaysia Korea Taiwan 0.1703 0.3837 0.3782 0.0851 0.2411 -0.1662 -0.0805 -0.0862 0.0310 0.0419 -0.0195 0.1984

Japan 0.3596 0.0885 0.1763 0.0899

Singapore 0.4837 0.2365 0.1651 0.2450

(ii) Negative Market Returns Malaysia Korea Taiwan 0.4540 0.2488 0.2544 -0.1903 -0.2551 0.0752 -0.1860 -0.2084 -0.2487 0.1129 0.2170 0.2592

Japan 0.1379 -0.2337 -0.0944 -0.0067

Page 35

EXHIBIT 5-4 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Korea market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45-degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Korea)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Korea)

0.6000

Momentum Returns Correlation and Equity Derivatives Return

0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

-0.2000

Momentum Returns Correlation and Equity Derivatives Return

(d)

-0.3000

0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

-0.2000 -0.3000

Market Return Correlation Korea MRe,MRe (Y1)

Korea MRed,MRed (Y2)

Market Return Correlation Korea Red,Red (Y3)

Korea MRe,MRe (Y1)

Korea MRed,MRed (Y2)

Korea Red,Red (Y3)

Table 5(d) Korea ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore 0.3902 0.0815 0.0328 -0.1197

(i) Positive Market Returns Malaysia Hong Kong Taiwan 0.0038 0.4666 0.3340 -0.0036 -0.0004 -0.0058 0.1086 -0.1725 -0.0154 -0.0743 -0.0410 0.1043

Japan 0.5592 0.1719 -0.1808 0.2785

Singapore 0.1863 -0.0562 -0.0481 0.1548

(ii) Negative Market Returns Malaysia Hong Kong Taiwan 0.3096 0.2037 0.2743 0.1447 -0.0308 -0.0366 0.0813 -0.1308 0.3248 0.0250 0.2213 0.2454

Japan 0.4382 0.1259 0.0398 0.2285

Page 36

EXHIBIT 5-5 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Taiwan market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation

Momentum Returns Correlation and Equity Derivatives Return

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Taiwan)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Taiwan)

0.6000

0.6000

0.5000

0.5000

0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

-0.2000 -0.3000

Momentum Returns Correlation and Equity Derivatives Return

(e)

-0.4000

0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.4000

0.5000

-0.2000 -0.3000 -0.4000 Market Return Correlation

Market Return Correlation Taiwan MRe,MRe (Y1)

0.3000

Taiwan MRed,MRed (Y2)

Taiwan MRe,MRe (Y1)

Taiwan Red,Red (Y3)

Taiwan MRed,MRed (Y2)

Taiwan Red,Red (Y3)

Table 5(e) Taiwan ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore 0.4352 0.1574 0.0466 0.1544

(i) Positive Market Returns Malaysia Hong Kong Korea 0.1622 0.4372 0.5014 -0.1230 -0.3299 -0.0367 -0.0598 0.1478 0.0266 0.2053 0.2951 0.2066

Japan 0.5267 0.2197 -0.1031 0.0900

Singapore 0.2501 0.1799 0.0709 -0.2247

(ii) Negative Market Returns Malaysia Hong Kong Korea 0.2812 0.2886 0.2679 0.0779 0.1817 0.0038 0.0043 -0.2761 0.2851 0.1008 0.1430 0.0924

Japan 0.0799 -0.0276 0.0736 0.1426

0.6000

Page 37

EXHIBIT 5-6 Correlations With Positive Market Returns and Negative Market Returns Illustrated below is the correlation of the momentum returns for the equity (Y1), the momentum returns for the equity derivatives (Y2), and the equity derivatives return (Y3) plotted on the y axis with the correlation of the Japan market return plotted on the x axis. The period of study for each country is from July 2006 to December 2006. The correlations of the momentum returns being equal to the correlation of the market return is demonstrated by the 45-degree straight line. Diagram (i) shows the correlations with positive market returns and diagram (ii) shows the correlations with negative market returns.

(i) Momentum Returns Correlation vs Positive Market Return Correlation

(ii)Momentum Returns Correlation vs Negative Market Return Correlation

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Positive Market Return Correlation (Japan)

Equity & Equity Derivatives Momentum Returns Correlation, Equity Derivative Correlation vs Negative Market Return Correlation (Japan)

0.7000

Momentum Returns Correlation and Equity Derivatives Return

0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

Momentum Returns Correlation and Equity Derivatives Return

(f)

-0.2000

0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 0.0000 -0.1000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

-0.2000 Market Return Correlation Japan MRe,MRe (Y1)

Japan MRed,MRed (Y2)

Market Return Correlation Japan MRe,MRe (Y1)

Japan Red,Red (Y3)

Japan MRed,MRed (Y2)

Japan Red,Red (Y3)

Table 5(f) Japan ρ(Re,Re), x axis ρ(MRe,MRe) (Y1) ρ(MRed,MRed) (Y2) ρ(Red,Red) (Y3)

Singapore 0.4086 -0.0567 -0.0281 0.1160

(i) Positive Market Returns Malaysia Hong Kong Korea 0.2564 0.5010 0.6370 0.0059 -0.0148 0.0426 -0.0495 0.1762 0.0206 0.1472 -0.0142 0.3456

Taiwan 0.5425 0.2721 -0.0402 0.2836

Singapore 0.3073 -0.0296 0.0693 0.1814

(ii) Negative Market Returns Malaysia Hong Kong Korea 0.2071 0.2607 0.5764 -0.0074 -0.0970 0.2445 0.0393 0.0130 -0.0643 0.2013 0.1510 0.1462

Taiwan 0.1403 -0.0974 0.0265 -0.0396

Page 38

EXHIBIT 6 Average Annualized Equity Price Momentum Return (MRe), Average Annualized Equity Derivatives Price Momentum Return (MRed), Average Annualized Equity Derivatives Return (Red), and Average Annualized Market Return (Re) in Up and Down Market Conditions Illustrated below for the six countries Singapore, Malaysia, Hong Kong, Korea, Taiwan, and Japan is the annualized average momentum return for equity and equity derivatives, the annualized average equity derivatives return, and the annualized average market return (percentage based) in up and down market conditions. Annualized Average Momentum Returns and Annualized Average Equity Derivative Return vs Annualized Average Market Return by Countries

Japan

Countries

Taiwan

Korea

Hong Kong

Malaysia

Singapore

-40.00% -30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% Annualized Average Market Return

Re (Positive Market Return) MRe (Positive Market Return) MRed (Positive Market Return) Rw (Positive Market Return)

Re (Negative Market Return) MRe (Negative Market Return) MRed (Negative Market Return) Rw (Negative Market Return)

Table 7 Country

Singapore

Malaysia

Hong Kong

Korea

Taiwan

Japan

Re (Positive Market Return)

42.53%

32.27%

43.44%

42.42%

36.57%

44.92%

Re (Negative Market Return)

-24.34%

-15.22%

-27.39%

-31.38%

-28.41%

-38.81%

MRe (Positive Market Return)

11.60%

3.91%

17.13%

8.25%

5.59%

9.26%

MRe (Negative Market Return)

-3.87%

5.20%

6.45%

7.41%

3.20%

11.75%

MRed (Positive Market Return)

36.42%

26.33%

18.28%

14.32%

6.52%

1.46%

MRed (Negative Market Return)

2.69%

16.96%

9.37%

5.04%

3.52%

1.30%

Red (Positive Market Return)

26.28%

16.71%

16.13%

5.91%

9.85%

4.05%

Red (Negative Market Return)

9.28%

11.81%

10.25%

3.24%

7.00%

4.83%