Research On Volume-Based Short-Term Momentum Strategy And Contrarian Strategy In China Stock Market

Since 1980s, the massive empirical researches have showed that there are some return patterns in the mature or emerging stock market of the world.These phenomena are called anomalies,which shake the basis of classical efficient market theory radically and can not be rationally explained by standard financial theories.Behavioral financial theories catch this opportunity and give the anomalies reasonable explanations,which cause the new theory pupular in academic world.As typical anomalies, momentum effect and contrarian effect are attracting more and more investors'attention.In the mean time, as the direct outcome of investment, trading volume plays important role in the process of deciding the return pattern of stocks. In this paper I combine these two aspects together. On the one hand, I do deeper research on short-term price momentum and contrarian strategy in Chinese stock market. On the other hand,I look for the relations between trading volume and short-tem return pattern, then make a discussion about the role which the trading volume plays in predicting the return pattern.In this paper,I first introduce the anomalies which cann't be explained by standard financial theories.And then I put emphasis on the economic explanation to the capability of price momentum and contrarian strategy to get excess return.The economic explanation is spread in traditional framework and behavioral framework.I test the validity of shor-term price momentum and contrarian strategy.I also investigate the profitability of volume-based short-term momentum strategy and contrarian srategy by way of empirical analysis.Then I give the underlying reason in behavioral framework.Below are my main findings. Firstly, the highest profit of pure and volume-based short-term momentum portfolio appear in 2×2 strategy, and the highest profit of the pure and volume-based short-term contrarian portfolio appears in 1×1 strategy. Secondly, stocks with high trading volume exhibit higher momentum return than stocks with low trading volume.Thirdly,volume-based short-term momentum strategy exhibit higher momentum return than pure short-term momentum strategy, and volume-based short-term contrarian strategy exhibit lower contrarian return than pure short-term contrarian strategy. Finanlly, I find that DHS model and MLC hypothesis can efficiently explain the pattern above.