The Momentum Effect And Reversal Effect In China’s Stock Market And The Theoretical Explanation

Since De Bondt found reversal effect in1985, and Jegaseesh found themomentum effect in1993, Chinese and overseas scholars made a greatquantity of research for the existence of the momentum effect and the reversaleffect on various stock markets all over the world. In terms of the study of themomentum effect and the reversed effect characteristics in China’s stockmarket, not only providing investment strategy for investors, but alsopromoting the balanced and healthy development of the stock market, it is ofgreat research significance.Based on the deficiencies or overreaction theory of the behavioral financein the stock market prices react to informaion, this paper adopts on Jegadeeshand Titman method of constructing the winner portfolio and loser portfolio,the monthly data of CSI300index section is from January2005to December2012, to test the existence of the momentum and reversal effect in China’sstock market. The empirical results show that, the stock market in one-yearshort term significant momentum effect, the stock market in two-year mediumterm significant reversal effect. As the growth of the test section, there is noreversal or momentum effect in four-year long term, it suggests that themomentum and reverse investment strategy do not work in China’s long termstock market.