Transaction Cost Analysis Of The Chinese Stock Market Momentum Strategy

As an important anomaly of the effective market theory, the momentum effect is one of the most serious challenges to the classical models of rational price formation. This phenomenon has received the international researchers' attention, and becomes a hot topic of investment which domain the recent years studies. The evidence demonstrated that, there are momentum effects in most stock markets. Some overseas scholars already started to analysis the transaction costs' influence from invest practitioner's angle, and started to discuss how can improve the momentum's profitability.It is noteworthy that, the China stock market's momentum effect research was still at the initial stage, the concerned scholar only research the momentum effect's gross earnings, and nobody has studied the momentum effect profitability after transaction cost. It is well known that, an investment strategy's profitability depends on how many profits it can bring to the investor, but not the returns. The size of transaction costs relate whether the momentum transaction strategies can earn profit, relate that the effective market hypothesis is establish or not, and also relate that whether investors can use the momentum phenomenon to do an arbitrage. If the momentum returns are bigger than its transaction costs, it indicated that the market weak effective hypothesis is untenable, and the momentum transaction strategy is profitable, then we should use the behavior finance to explain the property return origin; If the momentum returns are insufficient to make up the relevant transaction costs, then it indicated that we may use the classical models of rational price formation to explain the property income origin. If we cannot obtain profits through the momentum transaction strategies, the market is effective.However, the transaction cost research in our country blank at present, and no scholar has inspected the momentum strategy's profitability after transaction cost. This article has made up this blank. I use two methods to measure the transaction costs, and then I analyzed the momentum transaction strategies net profits in our country stock market. In the whole stock market, the momentum portfolios' net profits are not remarkable. Further more, in the cross-section; I get the conclusion that the stocks with big size, stocks with low turnover and stocks with high price can earn large abnormal momentum profit. Finally, I find the portfolio based on big size, high price and low turnover has extinguished momentum net profits.