An Empirical Study On The Momentum And Contrarian Trading Of Funds In China

Many market anomalies, such as momentum effect, contrarian effect, calendar effect, scale effect, and so on, have challenged the Modern Financial Theory greatly. Although some scholars tried to explain it from the angle of risk, the empirical study found that the momentum effect is still significant when the risk is considered. The Traditional Finance Theory can not give a reasonable explanation. As a result, the Behavioral Finance Theory based on the actual decision-making process explained those anomalies from the angle of psychological cognitive biases, and finally formed the theoretical model.Since the momentum effect and the contrarian effect generally exist in the stock market, whether the professional managers of funds use those effects had became the focus of our attention. Therefore, the article reviewed the historical development of Chinese fund, and then analysed the characteristics of the trading behavior briefly. In terms of the empirical research,I choosed the transaction data of funds from the fourth quarter in2004to the third quarter in2012. Then I adopted the GTW model improved by Badrinath and Wahal to checkout the characteristics of their trading behavior. The empirical results showed that, unlike the result acquired by Grinbaltt, the Chinese funds performed as the role of contrarian. Specifically, they tend to buy the shares which performed well in the past and sell the shares performed well, too. In addition, the article analyzed the different strategies implemented by funds which have different investment styles, and the different tendency under the three market condition. Finally, I found that the funds which pursuit the long-term appreciation of their capital had a more intense momentum and contrarian tendency. The funds under the market condition of vibrate have a lower momentum and contrarian tendency.Then the paper used the test of Spearman’s rank-correlation coefficient to compute the relation between the three indexes assessing the performance of the funds(time-weighted return,sharpe index,Jensen index) and their ITM index respectively. I choosed the database called "weekly data of assessment file" from the CSMAR’s evaluation system of fund. The result showed that funds which tend to buy or sell the stocks performed well in the previous quarter can always get a higher profit. But the effect of trading stocks according to their perfomence two quarters ago varies depend on the evaluation index. On the other hand, except the positive correlation between the time-weighted return(sharpe index)and the strategy of buying the stocks performed well a quarter ago and the negative correlation between the Shape index and the strategy of buying the stocks performed well two quarters ago, there is no evidence to prove that the rest of the investment strategies have a significant correlative relationship with the performance of the fund.Finally, I put forward some advices including (1)Make our efforts to build up the whole mechanism of Short Sales. Only in this way can we smooth the volatility of the stock market, increase the liquidity and speed up the process of finding stocks’ value.(2) Perfect the system of evaluating the funds’ return. We should pay much more attention on their long-term performance.(3) Improve the requirement of the public companies to enlarge our extention of investment.