An Empirical Research With Analysis On The Momentum Effect And Contrarian Effect Of China’s Stock Market

Since The Efficiency Market Hypothesis (EMH) was put forward in1950s, the effectiveness of the stock market has always been the focus of financial researches. Some anomalies existing in the stock markets seriously challenges The EMH, one of which is called "momentum effect" or "contrarian effect". Does China’s stock market have a significant momentum effect or contrarian effect just like developed countries such as the US, Germany or Japan do for the China’s stock market is an emerging and growing market? If it does, what causes the momentum effector contrarian effect?This whole dissertation which consists of five parts is to answer the two questions raised above as follows:The1st part is the introduction which gives a brief look at the background, the purpose and the value of the research as well as makes a review of the literature concluding both domestic and abroad researches. The2nd part is the theories the very research based on. In this part; we discuss the formation mechanism of momentum effector and contrarian effect as the foundation of the behavioral financial models. The3rd part is the empirical research of which the result shows there does exist the momentum effect and contrarian effect in China’s stock market in general by the momentum investment portfolios constructed according the performances of stocks in forming period. The4th part analyses the cause of the momentum effect and contrarian effect at length. We present the overall status and behavioral characteristics of Chinese investors firstly, and then we apply the method proposed by Jegadeesh&Titman in2001to seek for the reason of why there is momentum effect in short term and the contrarian effect in the long run existing in the China’s stock market. From the result of the test run above, we believe the over-reaction to the policies is the critical causation of the phenomenon of momentum effect and contrarian effect and what’s more, we try to explain the over-reaction of the investors from the perspective of psychology combined with Chinese traditional culture. The last part is the summary of the research and suggestions provided by the paper which aiming to both government and investors. Besides, there are also some possible ways of further researches pointed out in the end of the paper.