Empirical Study Of Style Momentum And Style Reversal In China Stock Market

Style investing is a new philosophy and method of investment which is limited to the stock portfolio with one market anomaly that corresponds to the sub-market by the investment managers. With the rising of behavioral finance theory, many studies have shown that when investors make investment decisions, a number of psychological factors which are susceptible to interference and are about to form wrong judgments, resulting in overreaction or underreaction. In the stock market of China, if the momentum strategy or the reverse strategy which based on style has a significant positive returns, and we can analyze the reasons for the existence of excess or source of the income, it will make an important practical significance for the actual operations or earnings forecasts of the funds and the other large institutional investors.In this paper,correlation analysis in the stock market of our country shows that the similar attributes of the stocks,the stronger volatility of them;the style is exists, and can be drawn that the smaller flow of market capitalization and the higher book value,the greater of the portfolio returns.In this paper, we use two kinds represent style momentum strategies:Chen and De Bondt's style momentum strategy (referred to as CD Strategy), and Lewellen's style momentum strategy (referred to as LN strategy) in the style level.Empirical analysis found that in the short and medium term of the China's stock market,the winners is always win and the losers turn into victory.To a certain style,buying stock to chase down the investment strategy may be to obtain excess returns.Containning two styles of CD Strategy earnings more than the CD Strategy which contains one style,the over-higher yields are obvious and enhanced significantly.The conclusions of CD Strategy and LN Strategy are the same basically:to hold the style which is divided by the size and the book value and used the momentum strategy can be profitable in the short and medium term. Empirical results of the three-factor model shows that the risk premium does not explain the style of momentum returns, the three factors are the benefits associated with the size,book value and the overall market portfolio returns. Behavioral Finance study the momentum strategy and the reversal strategy from the premise of non-rational decision-making,the scholars put forward three behavioral models,such as the BSV model, the DHS model and the HS model,they will combine of the overreaction or underreaction to explain the momentum returns and reverse gains.