The Empirical Research On Price Momentum And Contrarian And Trading Volume In Chinese Stock Market

Price Momentum means past winners (losers) continue to be winners (losers), and price contrarian means past winners (losers) become losers (winners) in the future. For price momentum and contrarian directly disobey the Efficient Market Hypothesis, they are looked as abnormal phenomenon of market and have become the conflict focus between traditional finance theory and behavior finance theory. Therefore both in academe and in practice field, it is of great importance to do research on price momentum and contrarian and corresponding trading strategies.In the mean time, as the direct outcome of investment, trading volume is the reflect channel of the information's entering. And it also includes investors' different understanding, expectation of information and different behavior characteristics. It thus plays important role in the process of deciding the return pattern of stocks.In this paper we combine these two aspects together. On one hand, we do deeper research on price momentum and contrarian in Chinese stock market. On the other hand we look for the relation between trading volume and medium- and long-tem return pattern, and then make a discussion about the role which the trading volume plays in predicting the return pattern. Below are our main findings. Firstly, there is no significant medium-term price momentum in Chinese stock market. But there do exists significant medium-and long-term price contrarian. The main source of corresponding contrarian strategy is the overreaction of investors. Secondly, there are complicated relations between trading volume between trading volume and price momentum and contrarian patterns. Stocks with low trading volume exhibit medium-term momentum and long-term contrarian, and stocks with high trading volume exhibit medium- and long-term contrarian. In the mean time, in the winners, high (low) volume stocks under-perform (outperform) low (high) volume stocks. Yet it is opposite in the losers. Thirdly, We find that behavior model composing of two kind of investors developed by Hong and Stain(1999) can efficiently explain the pattern above. And trading volume is also the proxy of the diffusion speed of information (both common information and firm-specific information) among investors. In another words, it is the proxy of the adjusting speed to information of stock price. Finally, we conduct empirical test for the third conclusion and find that high volume stocks adjust much faster to common information than low volume stocks, which are not affected by the firm size. As to the firm-specific information, stocks with high volume generally have higher adjustingspeed, but it is not the fact in the group of stocks with the largest size.