Study On The Performance Of Industrial Momentum Strategy In The Chinese Stock Market

According to the week-form market efficiency hypothesis, it is impossible for the investors to gain excess return by using the technical analysis. However, more empirical studies founded that the momentum effect is widespread in most of the stock market. As one of the abnormal cases, the momentum effect severely challenges the traditional financial asset pricing theory. Base on the momentum effect, the investor may gain abnormal return by purchasing stocks which are promising at the prophase while selling stocks with poor performance.It is widely known that investing behaviors shows the characters of pursuing rises & killing falls. The momentum characters of the market also display the tectonic plate wheel move and strong permanent is strong permanently. This prompted us to conduct in-depth research and analysis about all kinds of momentum effect in Chinese market. When compared to the foreign mature market, Chinese stock market has its own characters, such as relatively short history, strong speculation, trading rules and regulation is still not perfect. In such a changing market, the stock markets in China and abroad have similarities as well as difference. After reviewing the papers written by domestic scholars, we found that more studies focused on individual stocks, and the choice of the holding period and the formation period is just a direct copy of basic research methods introduced by Jegadees h& Titman. Due to the different time span and stocks included, there is no uniform conclusion.This paper is based on the overseas research methods, mainly focusing on the industrial index (using the weekly data from January 2005 to February 2011), trying to analyze the industrial momentum strategies and hoping to find the optimal parameters for the industrial momentum strategy. The result shows that the short-term momentum effect does exist in Chinese stock market, but the duration is much shorter than the mature markets abroad. Particularly, the industrial momentum effect in China is very sensitive to the market situation:there is a significant momentum effect in a bull market, investors can achieve significant excess returns using the industrial momentum strategy; but in a bear market, the early strong performance industrial will weekly perform later, thus the industrial momentum strategies" excess return is negative, and these two phenomena are statistically significant.After analyzing the industrial momentum strategies, this paper further focus on the stocks momentum strategy and made a comparative analysis of these two momentum strategies, trying to explain whether the industry momentum effect is the main reason for stocks momentum effect. At last, this paper made a comparative analysis of different industries in order to understand the differences between industries.