The Conversion Analysis On Share Price Momentum And Contrarian Effect In Investment Management Based On Fractal Market

Investment management plays an important role in fund companies. In the non-efficient market where share price has fractal characteristics as well as widespread momentum and contrarian effect, although certain excess earnings can be obtained by making use of momentum and contrarian effect for fund investment management, there is no excellent performance in terms of excess earnings in the long term. The reason may be related to the conversion between share price momentum and contrarian effect. In order to provide a reference for fund investment management on the basis of momentum and contrarian effect, an exploratory research is performed in this paper on how to implement investment management on the basis of the mutual conversion between share price momentum and contrarian effect under the realistic background of the fractal market, in allusion to the research tendency of usually regarding momentum and contrarian effect as two separate phenomena and neglecting the mutual conversion between them in the theoretical circle, based on the practical problems mentioned above and in combination with the realistic background where share price has fractal characteristics, so as to provide reference for fund companies to conduct investment management.Aiming at the research topic of this paper: how to implement investment management on the basis of the mutual conversion between share price momentum and contrarian effect under the realistic background of the fractal market, firstly, this paper verifies the preconditions such as fractal market, conversion between momentum and contrarian effect, fund momentum and contrarian pattern by establishing fixed contrarian coefficient, trading behavior measurement feedback index, and ranking effect coefficient with multifractal detrended cross-correlation analysis; secondly, this paper builds the fractal game model, mobile negative and positive line Hurst index, and the investment strategy based on the mobile negative and positive line Hurst index on the basis of the fractal market theory, and analyzes why there is a mutual conversion between the momentum and contrarian effect each other, how to identify the mutual conversion between momentum and contrarian effect, and how to undertake investment management according to the mutual conversion between momentum and contrarian effect step by step.The main conclusion of this paper is: the key to use momentum and contrarian Effect in i nvestment management is to identify the conversion between them, the mobile negative and p ositive line Hurst index built based on the fractal theory can identify the Momentum and Cont rarian Effect, which can be used in investment management, improving fund performance, reducing the behaviors which damage market healthy and stability like fund investment style drif t and fund families‘ creating-star strategy, also providing a feasible path for the supervisors to guide fund development and promote the market healthy and stability. The concrete conclusio ns are as follows:(1) The key of investment management making use of momentum and contrarian effect is identifying the mutual conversion combined with the characteristics of the fractal market. The mutual conversion between momentum and contrarian effect can roughly indicate the relative high or low level of prices, and identifying the high and low levels of price to choose market timing can contribute more than 90% of the investment performance. Fractal feature, momentum and contrarian effect are in universal existence in practice. The funds, under the ranking pressure, usually exploit the momentum and contrarian effect to manage investment, but with no sustained excess earning however. Using contrarian effect even exerts negative effects on the fund performance. It is related to the fact that the funds haven‘t used the matching momentum or contrarian strategy according to the mutual conversion between the momentum and contrarian effect, which caused them not achieving the buy low and sell high. Meanwhile, funds chase performance by investment style drift and strategies of fund families‘creating-star is non-conducive to the healthy development of the market.(2) The mutual conversion between the price momentum and contrarian effect can be illustrated with the fractal market theory. On the basis of the fractal market theory, investors’ characteristics of bounded rationality and sensitivity to information, as well as the minority and majority game, this paper introduces a dynamic decision-making mechanism based on the diversity of investors, gradually builds the fractal game model, and performs a simulation according to the model. The results show that investors’ characteristics of bounded rationality and sensitivity to information facilitate them to dynamically choose between the momentum and contrarian strategy, which is reflected on the excess demand change for securities, leading to the mutual conversion phenomenon between the price momentum and contrarian effect.(3) Mobile negative and positive line Hurst index can help in identifying the conversion between momentum and contrarian effect. According to the degree of consistency and the direction of the trend, this paper puts forward concepts such as the intensity of momentum and contrarian effect, increasing and decreasing momentum, as well as high and low contrarian, gradually builds the Hurst index as well as mobile negative and positive line Hurst index to identify the mutual conversion between momentum and contrarian effect based on the feature that Hurst index can depict the degree of consistency of the trend, and has found that the mutual conversion between momentum and contrarian effect can be accurately identified with negative and positive line Hurst index, which also has a certain universality, by calculating the success rate of identifying the mutual conversion between momentum and contrarian effect.(4) Investment management can be conducted according to the conversion between momentum and contrarian effect. When mobile negative and positive line Hurst index identifies the price sequence as increasing momentum and low contrarian effect phase or high contrarian effect and decreasing momentum effect phase, investors shall buy and hold or sell short positions, respectively; for several securities, investors shall buy and hold referring to the weight factor obtained in accordance with the rules above. According to the investment results in 6 kinds of industries based on mobile negative and positive line Hurst indexes with 12 deadlines, obvious long-term excess earnings can be obtained with this strategy, which is significantly higher than the overall average performance of the funds and the performances obtained with buy-and-hold strategy and simple momentum and portfolio strategy, either taking the accumulative return rate or the earnings after eliminating the risks as the performance measure.Compared with the many existing domestic and foreign research results on momentum and contrarian effect, the main differences of this paper lie in:(1) The topic of this paper is how to implement investment management on the basis of the mutual conversion between share price momentum and contrarian effect under the realistic background of the fractal market. The mutual conversion between share price momentum and contrarian effect in the fractal market is paid special attention to, which is different from the phenomenon that the existing literatures mostly separate momentum and contrarian effect and stay at the level of qualitative research, neglecting the realistic background with actual existence of fractal characteristics.(2) The intensive research on the mutual conversion between momentum and contrarian effect under the framework of the fractal market in this paper conforms to the objective condition that the actual market is a fractal market, filling the gap in the researches on momentum and contrarian effect with the fractal market theory and extending the application of fractal market theory. This is different from the phenomenon that the existing literatures usually separate investors’ rational expectations and behavior deviation in the analyses on momentum and contrarian effect, which greatly goes against the actual situation that investors have bounded rationality.