China's Stock Market Momentum And Contrarian Strategies In Empirical Research

The Efficient Market Hypothesis (EMH) considers that security prices always fully reflect the changes in information available, information is the only variable prices of the securities, securities prices can reflect the accurate and timely information on changes in a risk-neutral investors constitutes a competitive market, the securities fundamental values and prices are subject to the law of random walk, so the securities yields are unpredictable, investors can only get the average market returns. However, there are many phenomena in the stock market efficient market theory can not explain, such as the January effect, size effect, reversal and momentum effects. The so-called inversion effect refers to the phenomenon of stock market overreaction exists, that is experienced after over-react, often faced with reversal, investors can gain through this reverse effect of excess returns. De Bondt and Thaler (1985) will be a psychological reaction to the concept of over-applied to the stock market, that the stock market also exists the phenomenon of over-reaction. The so-called over-reaction is the futures market there is a series of good news or bad news too optimistic or pessimistic psychology, the past performance of good stocks (winners) are investors overestimated, while stocks with poor past performance (losers) are underestimated. Their empirical study found that the U.S. market loser portfolio after portfolio formation period cumulative excess returns of 36 higher than the market 19.6%, while the winner in the corresponding period combined cumulative excess returns lower than the market index rate of return of 5%. This investment strategy known as "reverse investment strategy." The so-called stock market momentum effect is that there is inadequate response to the phenomenon that the information changes and will not be immediately reflected in stock prices, but rather a gradual process of proliferation of the use of this investment strategy, investors can get excess returns. Jegadeesh and Titman (1993) first studied this phenomenon, they are empirical studies on the U.S. stock market before the discovery of 3-12 months, the highest yield stocks (winners in combination) in the next 3-12 months, the proceeds rate is still high; on the contrary prior to 3-12 months, lowest-yielding stocks (losers combination) in the next 3-12 months, yields remain low. On this basis, they constructed a "buy the winner portfolio and selling the loser portfolio" investment strategy, and achieved an average 12.01%of the abnormal returns, this investment strategy called "Momentum investment strategies." In this paper, on the efficient market theory, an overview of behavioral finance and behavioral finance to the challenges of efficient market theory, focusing on domestic and foreign information literature on investment strategy and momentum reversed the theoretical overview of investment strategies, as well as cutting-edge development, summed up the momentum strategy types of investment; focused on the momentum from a new perspective to analyze the effect and the reverse effect:First, from the point of view to study the momentum Knight sure the effect that the excess returns of momentum strategies from Knight, the uncertainty of this higher risk of compensation; second is from the perspective reversal effect of regression to the mean that regardless of a trend up or down no matter how long, will eventually return to its mean center. This article taken Jegadeesh and Titman's methodology, on China's Shanghai and Shenzhen A shares carry out empirical research, evidence is divided into short-, medium-and long-term strategy for a total of 36 species with the findings show that the effectiveness of China's stock market reversed long-standing use of reverse strategy can to obtain excess returns; China's stock market short-term existence of momentum effects, the use of available excess earnings momentum strategies; in the mid-level, the reverse strategy and momentum strategies is not obvious; For such empirical results, this paper argues China's stock market is not only the formation of a mature foreign anti-transfer and momentum effects of the factors, but also with our country-specific factors, namely, deficiencies in the stock market, as well as institutional investors in the distribution and composition, it is the role of both, making China's stock market showed more over-reaction and inadequate response to the phenomenon. Finally this paper, the investment strategy of investment in China's stock market recommendation that should be taken to reverse the long-term strategy, taking momentum in the short term investment strategy; another gives policy recommendations.