The relationship between financial distress risk and momentum anomaly in Tehran stock exchange

This paper is to study the relationship between momentum effect (continuation of prior returns) and financial distress risk using data from companies listed on Tehran stock exchange during 31/01/1387-31/04/1393. In this research, financial distress risk was calculated by the second version of Altman Z-Score model. To describe momentum effect, by determining the formation period to be 6 months, and the holding period to be 3, 6, or 12 months, we firstly examined the profitability of short term (3/6), midterm (6/6), and long term (12/6) momentum strategies and found that during abovementioned time period, only midterm momentum strategy was profitable. Then, we showed that momentum anomaly was driven by market under-reaction to financial distress risk. In other words, it can be said that momentum is proxying for distress risk, and is largely subsumed by distress risk factor.