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The Applied Research Of Momentum And Contrarian Strategy In China's Stock Market

Posted on:2011-04-22Degree:MasterType:Thesis
Country:ChinaCandidate:Y L GaoFull Text:PDF
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More and more empirical analysis find that the efficient market theory can not give a reasonable explanation and analysis to the stock market anomalies in the 20th century, such as the Monday effect, weekend effect, January effect, In order to explain these market anomalies, besides thinking about the rational economic, we should"put psychological studies and economic studies together, especially under uncertainty related research in the decision-making". This establishes behavioral finance theory.Behavioral finance theory holds that: investors have only limited rational, investors have much cognitive bias in the real decision-making, which inevitably affects the investment behavior, thereby affects asset pricing. On the stock market, the price reflects to information, which is either over-reaction or under-reaction. Based on the theory of over-reaction and under-reaction, there will be two most important investment strategy—Contrarian and Momentum investment strategy. Whether we can use these two strategies to get excess profits in the financial market is a fascinating issue. Meanwhile, this issue was worthy to research.Therefore, this paper is researching the subject. By reviewing the assumptions, basic theory and relevant models of behavioral finance theory and fully reviewing the literature of momentum and contrarian investment strategies. That: previous studies focused on testing the existence of two kind effects, did not take into account the realities of China's Stock Market.Therefore, referring to the research methods of home and abroad, we can classify stocks of China's Stock Market as large-capitalization stocks, small company stock, dividend-paying stocks and non-dividend-paying stocks. After taking operation steps and empirical analysis, we conclude: (1) it is effective of Momentum Investment Strategy in large-capitalization stocks that the formation and holding must be reach a certain period. And the greater fall in large-capitalization stocks, the more easily continuous. The smaller fall prices, the more likely contrarian; (2) It is more effective of Contrarian Investment Strategy in small company stocks that the formation and the holding in a shorter period than more. Meanwhile, the more increase of stock price in the small company stocks prices, the more easily contrarian, the more increase of stock price very minor, the more likely continue to rise; (3) It is more effective of Momentum Investment Strategy in non-dividend-paying than dividend-paying stocks. It is because the dividend announcement will have an impact on stock prices, what the impact would relation between the company's return on average capital employed and capital.Relying on empirical analysis results, starting point to the optimal portfolio functions and constraint conditions. From the time t = 0 to t = 1, research classification of large-capitalization stocks, small company stock, dividend-paying stocks and non-dividend-paying stocks achieve the optimal investment strategy. In the constraint conditions optimal portfolio expansion, by constructing a virtual portfolio of securities, though taking the momentum and contrarian strategies adjustment to the virtual portfolio of securities, two strategies will produce different profits. By comparing the two strategies profits to the benchmark strategy profit (not take strategies), can determine which kind of strategies is more effective.Starting point the virtual portfolio of the fund's holdings, through adjust different formation periods, different holding periods and different sample size, compared achieve profits of momentum and contrarian portfolio investment strategies adjust fund's holdings. In the specific applications of fund's holdings, Momentum Investment Strategy is more effective than Contrarian Investment Strategy, Conclusion that the curve of MG always below the curve of CG. A portfolio returns by taking Momentum and Contrarian Investment Strategy compared with the Shanghai and Shenzhen 300 index yields. Concluded: Contrarian Investment Strategy is more effective in the bull market and Momentum Investment Strategy is more effective in the bear market.Momentum and Contrarian effect are due to investors non-rational behavior though the investors'over-optimistic, over-confident or cognitive disorders psychological factors and so on. Therefore, though analyze the influence factors of investor behavior in making investment decisions. Hold that the investor sentiment and the sentiment cycle of market have connection. Such sentiments would be formation the feedback-loop mechanism in the stock market, leading to sharp volatility of stock market; Therefore, it is very important to take behavioral financial regulate policies to adjust the market.
Keywords/Search Tags:Behavioral Finance Theory, Momentum and Contrarian Investment Strategy, Applied Research, Regulation Policies
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