China's Stock Market Momentum Effect And Reversal Effect Inspection And Interpretation

Nowadays, traditional finance theories have been challenged. On one hand, abnormal phenomenon on stock market challenges the hypothesis of weak-form market efficiency. On the hand, the assumption of rational people is also challenged. In this process, behavior theory based on incomplete rationality develops.This paper begins with the presumption of incomplete rationality, combines with information communication theory and constructs the information digesting model. During communication process, not only information is communicated, but also feelings and viewpoints are communicated. So communication can affect people’s judgment. Irrational people will be affected by other people, especially the crowd, in the process of communicating, so that they make irrational decisions. Information digesting model based on this theory can explain the cause of stock price momentum and reverse. And we can deduce two inferences about different performances of momentum and reverse in bull market and bear market via information digest model.In the experimental part, the author uses Debont&Thaler(1985) and Jegadeesh and Titman(1993)’s methods to research on China’s stock market. The innovation is that this paper divides stock market into bull market, bear market and vibrant market and researches different performances of momentum and reverse in three market states separately. The outcome is there is obvious reverse in China’s stock market using year-datum, which is also proved by other scholars. But monthly momentum shows up in corporations with high market value and high stock price in bull market and bear market. But in vibrant market, only reverse is found. The inferences are also proved by empirical datum, but before more rigorous treatments on these inferences, the conclusion should be taken with reservations.