Purpose: The persistence of momentum in stock returns across both developed and emerging markets and the challenges that it poses against the Efficient Market Hypothesis created a need to explain its existence. Grinblatt and Han (2005) formulated a model to explain momentum using a well documented behavioral bias which is the Disposition effect. The focus of this paper is to analyze whether disposition effect drives momentum in the Egyptian stock market as one of the growing emerging markets that faces a considerable lack in behavioral studies.

Design/methodology/approach: The study is quantitative in nature studying whether disposition effect drives momentum using a sample of 48 companies through the time period 2004–2010. The relation between disposition effect and momentum will be analyzed empirically using Fama Macbeth cross-sectional regression.

Findings: Results show that there is no momentum in stock returns in the Egyptian stock market. In addition they show that disposition effect does not drive momentum in the Egyptian stock market as there is no significant relation between expected return and capital gain overhang. The results reveal useful insights about the Egyptian stock market that can be of beneficial use for both practitioners and academics.

Research limitations/implications: Limited number of active companies in the Egyptian stock market as well as the limited available historical data poses some restrictions in the implementation of Fama Macbeth regression and the calculation of reference price. In addition analyzing the profitability of momentum strategies across different market states may be required to provide complete picture about momentum in the market.

Practical implications: Relative strength strategies do not earn abnormal return in the Egyptian stock market, so practitioners are not advised to follow such strategies. In addition more advanced market mechanisms should be applied in the Egyptian stock market to improve its efficiency as well as increase the speed of information dissemination in the prices.

Originality/value: Detailed analysis of literature review reveals a significant gap in academic studies about the Egyptian stock market. This paper aims to fill this gap by analyzing whether there is momentum in stock returns and whether disposition effect drives momentum in the Egyptian stock market that differs from other markets where Grinblatt and Han (2005) has been previously applied and hence this provides an out of sample test of the model.