The Empirical Study On The Positive-Feedback Trading Of Security Funds And Its Impact On Stock Return Momentum In China Stock Market

Security funds are the largest institutional investors in China stock market. The positive-feedback trading of security funds has always been a heated topic in academic research. Up to now, the studies on China security funds' positive-feedback trading are concentrated on three main fields, the existence of positive-feedback trading, the impact of security funds' positive-feedback trading on funds' performance and the influence of security funds' positive-feedback trading on stock market. These researches are mainly conducted from two perspectives, the first one is to focus on the behavior of individual fund and the second one is to study security funds in aggregate. These researches treat stocks as homogeneous group. However, security funds may treat different stocks with different degree of positive-feedback trading.Based on the positive-feedback trading measure and methodology proposed by Shu(2007), we analyze comprehensively the positive-feedback trading of security funds across individual stock and study the impact of security funds' positive-feedback trading on stock return momentum in China stock market for the first time. This research helps us understand the role of security funds in China; especially whether security funds have the power of intensifying the stock return momentum. Finally, discussion on the impact of security funds' positive-feedback trading on stock market efficiency promotes us to know whether institutions are capable of improving market efficiency while engaging in momentum trading.In this paper, we choose stocks which are heavily held by security funds from the first quarter of 2002 to the second quarter of 2007 in China stock market as our sample and empirically analyze positive-feedback trading of security funds towards individual stock. We find security funds in aggregate indeed take positive-feedback trading in different degree towards different stocks and have more serious positive-feedback trading in bear market than in bull market. Finally, the positive-feedback trading of security funds in aggregate intensifies the stock return momentum, which hampers the efficiency of security market.