An Empirical Study On Short-Term Momentum And Reversal In China’s Stock Market

The EMH shows that the price of stock responds the information quickly, fully and exactly. However academics and practical circles find abnormal returns from the analysis of data. The traditional finance treats these as the market anomalies. Among these, momentum effect and reversal effect are the most interesting.Debond and Thaler(1985,1987) show that the return of winners will lower than the return of losers in the future3-5years. By purchasing the past3-5years lose stock, shorting the stock with good performance, this strategy can get an average of8%a year income. But perhaps the most puzzling results are the intermediate-horizon return continuations reported by Jegadeesh and Titman (1993). Forming portfolios based on past three to12month returns they show that past winners on average continue to outperform past losers over the next three to12months. Although many competing explanations have been suggested for the long-horizon price reversal patterns, far fewer explanations have been advanced to explain the intermediate-horizon price momentum effect. Rouwenhorst (1998) finds a similar pattern of intermediate-horizon price momentum in12other countries, suggesting that the effect is not likely due to data snooping-bias. Chan, Jegadeesh and Lakonishok(1996) show that intermediate-horizon return continuation can be partially explained by under reaction to earnings news but that price momentum is not subsumed by earnings momentum. Conrad and Kaul(1998) suggest that the momentum effect may be due to cross-sectional variation in the mean returns of individual securities.Blume,Easley and O’Hara(1998) shows that there is a relationship between returns and volume,this is the first paper about this field. Lee and Swaminathan(2000) studied the momentum from the volume and returns.They shows that past trading volume provides an important link between "momentum" and "value" strategies. Price momentum effects reverse over the next five years, and high (low) volume winners (losers) experience faster reversals. Fama and French (1996) show that a three-factor model of returns fails to explain intermediate-horizon price momentum.Domestic scholars study whether there is momentum effect in stock market, as for the reasons of the different approaches and time the sample and structure get from, though the conclusion is not consistent, most of the empirical get the negative results. The China’s stock market does not exist momentum effect (the T is not significant), but reversal effect.This paper shows that China’s stock market exists momentum effect within four weeks from the past performance of the return single. This article suggests that investors can continue to buy or hold the winners of the past, sell the losers of the past. But four weeks later, they can consider to buying the losers of the past. From two perspective, when formation period are less than four weeks, the arbitrage portfolio of low trading volume has momentum effect in the next eight weeks, so we can buy the past winners and sell the past losers; when formation period are more than four weeks, the arbitrage portfolio of low trading volume has reverse effect in the next eight weeks so we can sell the past winners and buy the past losers. No matter how long the forming period and holding period, the arbitrage portfolio of high trading volume always has reverse effect, so we just sell winners and buy losers,The results of this paper have some enlightenment to explore on the effectiveness of the stock market of our country. The information of stock trading volume can predict the future returns of stocks, explaining that the price of the stock did not reflect all information, and the price of the stock biases the intrinsic value.Because the price of the stock moves around the intrinsic value, so the price can be considered as the reverse close to the intrinsic value. From this perspective, the response of the super short term shortage and a little long-term excessive reaction can be considered as the process of the digestion about the price for all available news. The characteristics of the price adjustment is consistent with this empirical found and behavioral finance explanation.