A Study On Momentum And Reversal Effect In Chinese Stock Market

Among all kinds of stock market anomalies discovered by Western academia,momentum and reversal have the most profound and extensive influence.Different from some anomalies,arbitrage behavior leads to the weakening of "anomalies",and even some "anomalies" are the products of statistical bias and data mining.Momentum and reversal have attracted a large number of scholars to study it from a new perspective.DeBond and Thaler(1985)discovered a long-term reversal of stocks,Jegadees and Titman(1993)discovered mid-term momentum of stocks,others also discovered momentum effects in foreign exchange,commodities and bond markets.Scholars have studied the relationship between momentum and monetary environment,and market conditions,and stock types,and local culture.With the diversification of research perspectives,new results are emerging,momentum and reversal have become an indispensable part of stock research field.After 30 years of development,China's stock market has become the second largest market in the world.However,the volatility of the market,the dominant individual investors,and the low quality of information disclosure of listed companies are often criticized.The characteristic of momentum and reversal is a key fundamental question in stock market.To answer this question comprehensively is to improve the understanding of basic laws.Although Chinese scholars have achieved some research results in this field,there are still four theoretical challenges to break through: First,what is the law of momentum and reversal effect in China's stock market? What is the relationship between reversal of China's stock market and the state of the market,the types of stocks,monetary policy? It is necessary to use various portfolio construction methods,adopt different lag periods,method of yield with large sample to get reliable conclusions.Second,What is the reason for the momentum and reversal of stock prices in China's stock market? The research on the causes is extremely deficient,It has not been studied from the perspective of risk-taking,nor explored from the aspects of investor behavior and market structure;Third,Combined with China's stock market momentum and reversal characteristics,Can we improve the assetpricing model,enhance the pricing capacity to A share? Fourth,What are the structural characteristics of price momentum and reversal in China's stock market?The study in China's stock market is mainly concentrated on the whole market level.But whether structural momentum can be found by combining the new dimension of investor attention and investor belief heterogeneity? What is the structural relationship between the momentum and reversal characteristics of stocks and the industry? All these theoretical questions have great research value.In addition.The research on momentum and reversal in China's stock market can also expand the existing research samples and enrich the research results.The paper is organized as follows: Firstly,to reveal the basic law of momentum and reversal in China stock market,through a variety of methods,mufti-frequency,comprehensive empirical tests(Chapter 3);secondly,to analyze the characteristics and causes of the stock price reversal in China,under different market conditions,different stock types,different monetary policy.explore the causes of the reversal of Chinese stock market from risk taking,investor behavior bias,investor heterogeneity and cross-autocovariances of stocks(Chapter 4).Thirdly,the paper tries to construct a pricing model for China's stock market by using reversal factors.In addition,this paper examines the relationship between individual stock reversal and industry sector,and the characteristics of individual stock and industry momentum and reversal with different degree of investors attention(chapter 6).It tests the performance of price momentum from the perspective of investor heterogeneous belief,and explains the conclusion by using theoretical model(chapter7).Finally,it summarizes the whole paper and puts forward the policy Suggestions(chapter 8).The main conclusions of this paper can be summed up in five aspects: Basic law,Reason,Pricing,Structure characteristic and Investment strategy.1.There is price momentum in the daily frequency in China stock market,and the weekly frequency is significantly reversal,the monthly frequency is still reversal but significantly reduced,and the annual frequency reversal is only slightly stronger than the momentum;the high return of the loser portfolio leads to reversal;No matter market state and monetary policy condition,China's stock market shows reversal effect and the bear market has stronger reversal characteristics;Both growth stock andvalue stock show reversal effect in China.The reversal characteristics of China's stock market conform to the ideas of Taoist ideas and Chinese traditional Cultural.2.Stock price reversal in china equity market has both the risk-taking,over-reaction caused by investor behavior bias and the stock overvaluation caused by investor heterogeneous belief.Market risk Beta and market cap can better explain the reversal of China's stock market,and the degree and direction are completely consistent.However,After risk adjustment,the excess return of momentum portfolio is still significantly negative,indicating that the reason for risk-taking is not enough to fully explain the price reversal.Other reasons: First,China's market is not easy to short sell,investors divergence(investors heterogeneous beliefs)results in the stock overvaluation;Second,investors' behavior bias leads to over-reaction;Third,reversal are due to positive cross-autocovariances of returns.3.The pricing model with reversal factor has the most powerful pricing power in China.Considering the characteristics of the general stock price reversal in China,this paper constructs a stock pricing model including reversal factors.The test shows that the new model has the strongest pricing power,which is superior to Fama-French five-factor model,Q-factor model and Fama-French three-factor model.In China,the degree of influence on stock returns from strong to weak is: market cap,reversal,book-to-market ratio,and earning.4.There are significant Structural Characteristics in A Share.The reversal characteristics of stocks within the industry are stronger than that in individual stocks level.A stock,no matter which industry it belongs to,its return has exceeded the industry benchmark more in history,and its future performance will be weaker than the overall level of the industry.while the stock with high investor attention is reversal;the industry momentum is stronger with low investor attention,and the industry momentum is still significant after risk adjustment;Both low investor heterogeneity portfolio and high investor heterogeneity portfolio show the characteristics of momentum.5.For China's stock market reversal effect,risk-return profile of "buy losers sell winners" strategy is good,in bear market performance is better;as the existence of industry momentum,trend following strategy is feasible,when investing in a certainindustry sector,picking up the stock that is weaker than the industry's benchmark;For stocks and industries with low investor attention have momentum characteristics,chase up,For the high investor attention stocks and industries are easy to reverse,avoid glamour stocks and sectors,investors should buy stocks when headline events occur,after the news spread,take profit firmly.The main innovations of this paper are:1.For the first time,a comprehensive analysis is made on the reasons for the stock reversal effect in China.Risk-taking,the stock Beta and market cap are considered to be partly responsible for the price reversal,but they can not fully explain the reversal.In addition,from the investor behavior bias and investor opinion divergence,we use the over-reaction theory,Miller model to analyze the causes of price reversal in China.It is concluded that the price reversal in China's stock market is the result of risk-taking,investor behavior bias,and divergence of opinions,cross-autocovariances.2.Construct a new asset pricing model.In one-dimensional grouping,the statistical significance of the reversal in China's stock market is higher than that of earning,book-to-market ratio,investment,which is second only to the market cap.In the case of significant reversal of individual stocks in China,copying the four-factor model containing momentum(Carhart,1997)is inevitably not effective.This paper constructs a new pricing model including "reversal factor" and finds that new model has the strongest pricing power in China's stock market.3.Expand the existing research ideas on momentum and reversal.This paper uses the latest behavioral finance theory to study the relationship between stock price momentum or reversal and investor attention for the first time,and finds that the degree of investor attention has a greater impact on stock momentum and reversal.In addition,momentum and reversal of individual stocks is related to the heterogeneity of investor beliefs and higher order beliefs.Existing studies suggest that China lacks momentum effects,and this paper finds that there is significant structural momentum in China.4.Innovation of research methods.This paper combines the two dimensions of individual stock and industry sector,and adopts the research method of industry-adjusted individual stock returns.This method has not been used in theexisting research literature.Based on this,some meaningful conclusions are obtained.In the aspect of selecting investor heterogeneous belief proxy,combined with the reality of China's stock market,we adopt the turnover ratio based on the floating share,the change rate of trading volume,the number of trading transactions,daily return volatility as proxy.