The Momentum Effect Of Industry In China 's Stock Market

Industry momentum effect refers to the trend of the industry yields with the continuation of history movement direction. Most of the studies, both at home and abroad, have found that industry momentum effect does exist in the stock market, which is, higher yielding industry over the past period of time will obtain higher yield in the future. But in our stock market, there is not a clear understanding of industry momentum effect and its application value. In light of the fact that early studies on industry momentum effect in Chinese stock market still exist certain difference and the focus is also different, this paper tries to establish a systemic framework of China’s stock market industry momentum effect, make the existence of the momentum effect in industry inspection as the breakthrough point, and discuss the generating mechanism of industry momentum effect and its application value.Based on SWS primary industry data from 2000 to 2012 as samples and Jegadeesh and Titman (1993) classic observation period-holding period model, we use the overlap sampling method to test all the samples and the existence of the industry momentum effect between partitions. Then we move on by considering transaction costs and the filter threshold for robustness tests. Second, respectively from the price risk, behavioral finance and Knight uncertainty, we try to test and analyze industry momentum effect mechanism, compare different theoretical explanatory power of excess earnings momentum effect, and discuss more appropriate reason of the momentum effect. This paper also simulates the test of running effect of industry momentum strategy, and considers the transaction cost and imperfection of shorting mechanism.In this paper, we find that in Chinese stock market, there is relatively significant industry momentum effect, which shows the reversal effect for a long time. After the robustness test of the transaction cost adjustment and relaxation industry screening threshold, the empirical result of the whole samples remains significant. While risk-based pricing perspective cannot fully explain the cause of the industry momentum effect, positive feedback model plays a significant role in Chinese stock market short-term momentum effect. The widespread of investors with positive feedbacks and the lack of arbitrage traders on the market are the main reason why the momentum effect exists, which has a certain relationship with Chinese stock market investment style and investors’ structure. The simulation test results show that the quantitative investment strategy based on industry momentum has strong applicability, and zero-cost self-financing portfolio significantly outperforms the A-share market index, with the yield from 2000 to 2012 as high as 472.19%. After considering the short-selling restrictions, buying the winner portfolio still can help to obtain obvious excess returns, which is 265.72% from 2000 to 2012.