An Empirical Study On Momentum Trading Of Mutual Funds In China

As an important anomaly in stock market, momentum effect and contrarian effect become the most significant discoveries and hotspots in contemporary financial research. Momentum effect means that stock price movements remain on the stage; however contrarian effect means that the stock price movements change the trend of the last period in this period. The discovery of momentum effect and contrarian effect poses a great challenge to the Efficient Market Hypothesis (EMH), but also means the momentum and contrarian trading may gain abnormal return. For the causes of momentum effect and the abnormal return of momentum trading, the traditional asset pricing model cannot give a convincing explanation, however, behavioral finance try to analyze it in the views of mentality and behavior bias of investors. In the meanwhile, the momentum and contrarian trading, which base on momentum effect and contrarian effect, are used by more and more institutional investors and individual investors. China’s fund market, with the development of the stock market, has experienced unprecedented development in the recently year. For the China stock market and mutual fund, this paper has the theoretical and practical significance.This article study as follows:fist of all, we define the momentum effect and the momentum trading, then, we made a summary on foreign and domestic research about our topic. Secondly, we investigate the source of momentum return in the views of traditional finance and behavioral finance. In the end, we test the momentum trading of Chinese fund and explain the conclusion of our empirical research.This paper is divided four chapters, the structure arrangement as follows:The first chapter is the introduction, in this part we introduced the theoretical and practical significance of our research, and we come to the research method in my paper.The second chapter is the introduction of theories. In this chart, we explain the Efficient Market Hypothesis (EMH) and the finance anomaly, then, introduce the most important finance anomaly-momentum effect and contrarian effect. Then, we made a summary on foreign and domestic research about momentum effect and contrarian effect and the momentum and contrarian trading. At last, the abnormal return of momentum trading is explained by the traditional finance and the behavioral finance.The third chapter is the empirical research on the momentum investment behavior of Chinese mutual funds. We take the trading data of Chinese mutual fund between fourth quarters in 2002 and fourth quarters in 2008 as our data. The model in our research is ITM model of momentum, which is made by Badrinath and Wahal (2002). In this paper, the empirical research includes the momentum investment behavior of Chinese mutual funds, the momentum trading of the fund with different investment styles, the momentum trading of the fund in different market states and the robust test.Fourth chapter is full text summary.The results of the empirical studies on mutual funds in China indicate that:Firstly, we find that mutual funds in China do not act as momentum traders as a whole. the entire funds do not trade as momentum traders; Chinese funds tend to be the momentum traders both when they enter, buy and adjust to ongoing holding stocks; but they act as constrain traders both when they exit and sell stocks;Secondly, the empirical analysis of mutual fund with different investment styles shows:All kinds of funds adopted momentum and contrarian strategies, but the magnitude of momentum trading is largest for value fund.At last, the research on mutual fund momentum trading in different market states indicate that:when the market states is UP, funds tend to act as a contrarian traders; when the market is DOWN, the fund do not perform as a momentum traders. The market states influence the magnitude of momentum and contrarian trading behavior of mutual fund.