The Profitability Of Jump Combined With Momentum Strategy And Contrarian Strategy

The momentum effect and contrarian effect in stock market are always hot topics not only among the academic circle but also in the industry groups. However, the related researches or trading strategies in the past usually started from how to choose the right stocks when applying the above effects. On one hand, it’s meaningful if we can find the right time point where we will be allowed to forecast the market trend. On the other hand, jump has the timing effect but no one has combined jump with trading strategy. This paper combined the technique of choosing stocks using momentum or contrarian strategy with jump’s timing effect so that the investors will be able to forecast the trend of the market and improve the effect of the new trading strategy.The sample period we used is ten years which include the relatively complete market cycle. And the stock pool is Shanghai A shares. We found that the new strategy showed advantages not only in returns of the portfolio but also in risk indicators like Sharp Ratio and VaR when compared with the original trading strategy-pure momentum strategy or pure contrarian strategy. Then we also found when compared with jump combined with the momentum strategy, jump combined with the contrarian strategy gave higher portfolio returns and better behaviors of risk indicators. Based on the new strategy improved from the original pure momentum strategy and pure contrarian strategy, I tried to make the strategy better by doing adjustment to the lag period, stock pool and the number of the stocks in the portfolio. We found that if we limit the stock pool in the stocks with small size of the company, the performance of the new strategy will be further improved. And the number of the stocks in the portfolio can also make the strategy better.