Empirical Research On Information Uncertainty And Returns At China's Stock Market

Empirical evidences show that CAPM cannot explain such market anomalies as size effect and momentum effect. However, the evidences all over the world show that momentum effect has been found at every market. How to give an explanation for momentum effect has since been the new era for scholars.Behavioral finance theory gives a possible explanation that investors'under reaction to new information is the reason. My paper is trying to find the intrinsic rule for stocks'momentum effect. Based on Zhang (2006), there exists momentum effect in US stock market. And there are some"information uncertainty"which can amplify momentum effect, which means, higher information uncertainty will bring a relative lower return when there is bad news and a relative higher return when there is good news. My paper uses empirical analysis on chosen variables and stock returns to find if there exists any information uncertainty at China's stock market. The results show that:1. There exist two kinds of momentum effect at China's market (post-revision price drift and price momentum). Based on analyst's revision on stocks between this and previous month or past stock performance, a trading strategy of buying a good news stock portfolio and selling a bad news portfolio can yield a significant abnormal return with high probability.2. Five variables chosen in this paper cannot be considered as information uncertainties when the momentum effect triggered by analyst revision. However, AGE variable and Cash flow variable can be considered as information uncertainties by price momentum. A trading strategy based on these two uncertainties can yield a significant abnormal return.