China's Stock Market Momentum Effect And Its Characteristics: Evidence From Weekly Data

As the most important anomaly to the Efficient Market Hypothesis, 'momentum effect' is one of the most serious challenges to the traditional risk-based asset pricing paradigm. The sustainability of medium-term momentum returns in worldwide stock markets throughout the last several decades has become the hot focus of the academic community recently.Many results of experienced test show that momentum effect does not exist in Chinese stock market. However, the intuitive feelings of the experienced investors in the stock market and the conclusion of the majority of researchers are contradictory. There is momentum effect in Chinese stock market or not. And if there is, how the existence of momentum effect is. These are the most concerned questions of the domestic researchers of financial theory, investors and regulators in the stock market. We, according to unique fluctuations characteristic of Chinese stock market, classify the stocks with different characteristics (large companies and small companies, high prices and low price, high turn and low turn, value and growth) .And then, we inspect the momentum returns of each group of stocks with Jegadeesh and Titman (1993) method. At the same time, we do not copy Jegadeesh and Titman (1993) method mechanically, and we improve the method in some aspects: First, as everyone knows, the performance of American stock market is 'bull long, bear short', but the performance of Chinese stock market is 'bull short, bear long'. There is a very big difference between the two markets. We take the special features of fluctuations in Chinese stock market into account, use the weekly yields of the stocks in Chinese stock market as research samples, classify the stock samples in accordance with the performance features of momentum effect, and conduct the test of momentum effect using the weekly yields of the arbitrage portfolios. It will make our results be more in line with the volatility characteristics of Chinese stock market. Secondly, we consider that, from 1991 to 1994, there are a relatively small number of stocks, and most of them are 'rise and decrease together'. This circumstance will have an impact on the test results, so we will set two study intervals, that is, from January 1991 to December 2005 and January 1995 to December 2005. This division of the intervals will make our experienced test be more comprehensive and comparative. Finally, we use geometric average to calculate the weekly yields and metric the yields of the observation periods and the yields of holding periods in the (J, K) strategies. We did not use arithmetic average which is used in Jegadeesh and Titman (1993) method. This is because that if the volatility of the yields is serious, the use of arithmetic average will lead to overestimation of the long-term yield, maturity relative to foreign mature stock markets, the volatility of weekly yields of the stocks in Chinese stock market is significantly greater. Therefore, we calculated the accumulated yields of observation periods and the holding periods using geometric average, and set the accumulated yields as sorting indicators and metric indicators of momentum returns. It is more reasonable.The results of this article have shown that: In Chinese stock market, if we use momentum investing strategies which base on the stocks of large companies, the stocks of high price, growth stocks, we can get significant excess returns; In the study interval from 1991 to 2005, the momentum of the high turn stocks is more obvious than that of the low turn stocks. In the study interval from 1995 to 2005, the conclusion is just opposite; Further, the arbitrage portfolios which based on the characteristics of large companies, high prices, high turn, growth from 1995 to 2005 and the arbitrage portfolios which based on the characteristics of large companies, high prices, low turn, growth from 1995 to 2005 have very significant momentum returns. Compared with the former one, the latter one has more notable momentum returns.Throughout our experienced test, we can get that the performance characteristics of momentum effect of Chinese stock market and that of foreign mature stock markets are not exactly the same.