Research On Momentum Strategy And Contrarian Strategy In China’s A Stock Main Broad Market

In the framework of the classical finance, stock market has been assumed to be effective market where investors are not able to obtain excess earnings according to any information, but this assumption is often untenable in the real stock market. On the basis of the related literatures, investors can obtain excess returns by purchasing the equity portfolio which increased and decreased most in the past in stock markets of many countries and regions, which has been called the "Momentum effect" or "Reverse effect" by scholars, and this strategy is called "Momentum strategy" or "Contrarian strategy". It’s the these two strategies based on the past share price information that challenged the efficient market hypothesis (EMH) by Fama, which makes many academics and investors begin to focus on the momentum and contrarian strategy and thus promotes the birth and development of behavioral finance (BF).Researches on Momentum strategy and contrarian strategy is based on the challenge that BF issued to EMH. They not only make many scholars begin to focus on the vital academic issue whether the market is effective or not, but also leave many investors enthusiastic about its effectiveness and profitability in order to find strategies by which we can beat the market. Especially for us investors in China, the stock market operation mechanism is not sound enough, irrational investment behaviors lead to the market risk more significant, investors are not able to get good returns from the market. Even when Chinese economy developed at top speed the market value of shares held by investors reduced by step to step, which is inconceivable for a mature stock market. Therefore studying the momentum and contrarian strategy in China’s A-share stock market discovers unique behavioral characteristics on one hand, making us have in-depth understanding of China’s stock market; on the other hand it can instruct investors to establish a correct and reasonable investment philosophy and invest conservatively by use of valid data index rather than blindly buy stock. Doing so can greatly improve the crux that China’s stock market run unsteadily, and guarantee its healthy development.The main content of this paper can be roughly divided into three parts.The first part is to review the literature. This paper reviews researches on the momentum strategy and contrarian strategy published by scholars at home and abroad, and I found that there exists the medium-and-long-term reversal effect and short-term momentum effect in most foreign stock markets. And In some researches in China market, scholars are unable to reach a consistent conclusion, which is mainly because that the time of the development of China’s stock market is still short, the quality and quantity of data are difficult to guarantee, the trading mechanism is not perfect, market investors are mainly made up of retail private investors and so on. At the same time, I consider that our researches on the momentum and contrarian strategy is not perfect and strict, even some papers badly lacked rigor and rationality, it is necessary to continue to improve our study on this aspects. Looking at the large number of domestic and foreign literatures, many scholars select the stock returns as the only indicators, although the stock returns could contain important market information, but it is not enough for the complex stock market, it is necessary to add other indicators in order to strengthen effectiveness and profitability of momentum and contrarian strategy. Trading volume is consider as a reliable technical indicator, its change is influenced by the macro economy, industry areas, quoted companies, investor psychology as well as the risk-benefit of other alternative investment objectives and contains key information. Therefore studying the momentum and contrarian strategy in the stock market should add the volume as another selection indicator. The second part is the empirical study on the effectiveness of the momentum and contrarian strategy in China’s A-share main board stock marke. The paper refer to methods and ideas from Jegadeesh and Titman (1993), select weekly share yield and turnover data since January42002to December122011in the main board market, adopt1-week,4-week,13-week,26-week,52-week,104-week,156-week cross matching way, on the mechanism of not going short, the author redesign the mathematical model and make empirical study on the momentum and contrarian strategy using the stock yield indicator, as well as creatively uses (yield, turnover) selection indicator to build winner and losers portfolios and further analyses revenue structure of the momentum and contrarian strategy. It should be noted that most articles in the past take conventional T test on excess yields series, but these yield series exist autocorrelation and heteroscedasticity characteristics in the general, using traditional T-test will underestimate the standard deviation of estimators and result in overvaluing significant test excessively. Therefore the author adopts Newey-West method to adjust the error in order to avoid the autocorrelation and heteroscedasticity of yield serious, and ensures the authenticity and accuracy of empirical results.The result reveals that both the momentum effect and contrarian effect present significance and the possibility of obtaining positive excess returns will be bigger with the time span of investment increasing as well as the yield rate. At the same time, the author further makes comparative analysis and find out when the holding period is more than1year, the excess returns and T-value of contrarian strategy are lower than the case of momentum strategy in same (K, J) strategy, which illustrates A-share main broad market in China is not an efficient market.When adopting (yield, turnover) two-dimensional indicator, the result displays that high turnover stock portfolios make excess returns inverse in short term and maintain positive excess returns both for winner portfolios and loser portfolios; on the contrary, low turnover stock portfolios only keep excess returns in the long term and can’t show significance in the short term. As can be seen, investors should avoid high turnover stock portfolios and choose low turnover stock portfolios using momentum and contrarian strategy. This paper also further explains the phenomenon, the speed of information dissemination causes the difference of earnings of winner and loser portfolios for different turnover. In addition, the author summarized that the high turnover stock portfolios which increased or decreased largest in the past will show a certain degree of short preferences in short term, resulting in stock price reversal or inertially fall.Besides, this paper also discusses the robustness of momentum and contrarian strategy. The paper selected the time from January42006to January112008as the bull market time, January142008to January92009as the bear market time, study the effectiveness of the momentum and contrarian strategy during these two sample periods. The results shows that the investors will obtain significant negative excess returns in the short term in the bull time applying momentum or contrarian strategy and will not show significant gains in the bear time. As can be seen, investors should uphold long-term investment philosophy in a bull time and not frequently buy shares in short term. This conclusion is also proved that there is not the robustness of the momentum and contrarian strategy in the A-shares main broad market.The third part is to propose investment advice and policy recommendations. Through empirical study, this paper basically shows some important features for the A-share main board market in China, which provides investors and regulatory authorities with targeted advice. The author hope that these recommendations can improve a part of problems existing in Chinese stock and play an important role in the healthy development of A-share stock market in China.