The Stock Market Industry Momentum And Individual Stock Momentum Effect

Momentum effect is strategies that which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns in short run, which is one kind of the financial anomalies that can't be explained by the CAPM. Industrial momentum is one kind of momentum effect. Because the average returns of the industry which the individual stock belongs to keep a rising and decline trend, individual stock returns keep a rising or decline trend in a short period. Industrial momentum has been argued to drive the individual momentum in the US securities market. The question this thesis will answer is whether the industrial momentum is the driver of the individual momentum in the China securities market. To achieve this, this thesis, based on the understanding of the related theories and literatures, selected the listed companies in the Shanghai Stock Exchange and the Shenzhen Stock Exchange as samples, and established individual momentum strategy and industrial momentum strategy. There are several conclusions after analyzing and comparing the returns calculated by using the equal-weighted average method and the value-weighted average method. The individual momentum lasts about 2 to 4 weeks in the China stock market, while the industrial momentum lasts about 2 weeks in the China stock market. The individual momentum profit is more than the industrial momentum profit whether using equal-weighted or value-weighted average method, so we can't conclude that industrial momentum drives individual momentum. Behavioral financial models based on "underreaction" may provide some possible explanations for the individual momentum. The result that the industrial momentum profit is less than the individual momentum profit may indicate that the operating environment and conditions of the domestic listed companies within the same industry are different significantly.