| Since the1970s the efficient market hypothesis (EMH) developed vigorously and has became one of the pillars of modern financial economics theory. The efficient market hypothesis is the theory about price reaction to all kinds of information and levels of the reaction.The hypothesis tells that when the stock market that made up of rational investors prices accurately and rapidly with information.Even if the market consists of a portion of the irrational investors, for the differences between irrational investors, the impact of irrational investors as a whole on the stock market is zero, and the existence of arbitrageurs ensures even irrational investors deviate from the rational standard as a whole, the market can also be effective through arbitrage. The efficient market hypothesis is concise and clearly explained the basic characteristics of the capital market price changes, but the on rational investor hypothesis is too strict for reality. Moreover, since the1980s, more and more financial anomalies were found, such as the momentum effect, the reversal effect, the calendar effect and the small company effect and so on. These financial anomalies show that the efficient market hypothesis which implies the unpredictability of the price fails.Jegadeesh and Titman (1993) proposed the momentum which is the combination of the buying the winner portfolio can and selling the loser portfolio. This portfolio make profit in the medium term and is significant in statistical sense, suggesting that the price of the stock portfolio changes can be predicted by the history of the stock yields. Since then, other scholars found that the momentum effect exists not only in the United States market, but also in Europe, Australia, Hong Kong, Singapore market.In addition with extending the sample in time the result is still not changed, indicating that the arbitrage behavior with the efficient market hypothesis can not eliminate the predictability of stock. Part of the study also shows that there are institutional investors trade with the pure momentum strategy or the improved momentum stragegy. The using of momentum strategy did not result in the vanish of the momentum effect. This makes the momentum effect more notable. The efficient market hypothesis in the empirical test often needs the aid of the expected return model, such as asset pricing model and arbitrage pricing model, but a large number of market shows that momentum earnings is unable to be explained by models such as CAPM model and the CAPM model based on consumption, Fama three factor model. This shows the efficient market hypothesis doesn’t explain all the phenomenon of the market from anonther side.So far, behavioral finance provides a reasonable explanation for the momentum effect. There is a variety of models which are directly or indirectly on the basis of psychological deviation. There is underreaction which results in inadequate response to the price of sustainability, and overreaction means reversal effect exists on stock price for a long time. These models while breaking the rationality the efficient market hypothesis tells about the market as a whole, but are still on the basis of the efficient market hypothesis in terms of theory building. Behavioral finance that on the basis of the classical finance is trying to make more comprehensive interpretation about the market. Many asset bubble in history shows that the view of rational on the whole is debatable. Investors’abilitiy in information collecting, analysing are different. A number of investors making investment decisions lack the rational analysis. Arbitrage is limited by resources endowment and the policies.These make the rational investors unable to select the optimal arbitrage, but choose the suboptimal investment decisions, namely following the irrational behaviour. Researching the Irrational behavior does not mean unrestricted, it means take a rational framework for analysis of Irrationality. That is to say, behavioral finance still has the scientific nature, and treats the traditional theory as the foundation. Famous HS model, the BSV model, DHS model in behavioral finance all make explanation for the momentum effect and its reversal afterwards. There is no fundamental difference between these model, but slight difference based on their psychological deviation basis. HS, however, is regardless of the specific psychological deviation but only describes the behavior of the investors with psychological bias. In addition to the investors’ psychological factors, researchers have tried to find the relation bewteen momentum effect and the macro economic variables, but empirical evidence shows that the link is not significant. Besides, Conrad and Kaul (1998) attempted to show that the main source of the momentum effect the cross-sectional differences between the stocks. But the views did not get widely recognized in researchers. Classic asset pricing model has been have proved unable to explain the momentum returns in a large number of empirical studies. Some researchers use the classic model with time-varying parameters, this raises the explanation to some extent, but the result is not very ideal. Some researchers question the exsistence of the momentum from the perspective of transaction costs, whiche indicates that gains vanish after deducting costs, but because the estimation method of transaction cost are numerous and complex, this view is not widely shared.Foreign research causes the domestic scholars’studies on the momentum effect. A large number of scholars test the exsistence of the momentum effect in the domestic stock market. There is the wide divergence among the results. Most researchers suppose the momentum effect in the medium term does not exist in the domestic stock market, but if test the short-term cycle the momentum effect could be found. With stock features in the momentum effect,the domestic scholars obtained the reslut which isdifferent with foreign research. The study found that in the A-share market the momentum effect among the large maket value, high price and low turnover is stronger.It is worth noting that the Chinese stock market is young compared with mature markets, market participants and the rules of the market mechanism is still not very mature which may presents different forms of the momentum effect. In addition, the domestic scholars in the past does not take into account the lack of margin mechanism in A-share market.The lack of margin makes the momentum strategies can not be exercised actually. The domestic researchers suggesting that the investors can gains through unilateral momentum strategy, namely to buy the winner portfolio only in such situation.This article selects278stocks from1995to2012and uses the method in Jegadeesh and Titman (1993) to build the momentum of the combination annual.Due to the large number of literature shows that the A-share market does not exsit momentum effect in the medium term and for the facilitate comparison to other research, this article build the portofolio weekly. Tthe study of the short-term momentum effect shows that the A-share momentum effect changed in the period from1995to2012.Initially market momentum effect exists, but became apparent reversal effect in the mid-term, finally momentum and reversal effect tends to disappear. This article also sorts the278shares with the price, market value and turnvoerin in2012. Studies have shown that the stock of high price, high market valueshares and low turnover have stronger moment effect than the stocks of low pice,low market value and the high turnover which is consistent with past literatures.The key of the momentum strategy is short selling and buying is feasible. The the gains form the zero cost portfolio proves there exist arbitrage opportunities, the innovation of this paper lies in that the selected278stocks are the margin target from November25,2011. This artical treats the date as an important division point and studies the effects of margin trading for momentum strategies. The results show that the margin trading reduced both the momentum gains and the reversal gains. This paper argues that this is due to the margin business provides a feasible way of arbitrage and the using of the stragegy by the investors in the A-share market make the strategy gains disappear gradual. In addition, after considerating the actual profitability based on the analysis of the strategy revenue after deducting margin cost this artical argues that the simple short-term momentum or reverse strategy have been unprofitable. Deficiency of this article is that the time varying of other variables are not considered, however this article simply demonstrated the overall trend of the market does not have a significant impact on the strategy portfolio, considering the market price is the reflection of relevant information (though is not perfectly effective), so the long-short strategy portfolio can hedge the systemic risk and its related changes of some economic and regime variables to a certain extent. Another contribution of this paper is to extend the behavior model of momentum traders in the HS model. Momentum traders are believed to be considering the historic performance of momentum strategies, reverse strategy, in addition to the historical yield of stocks and this can explains why the momentum effect and the reversal effect appear alternately in short-term in the A-share market. In addition, Jegadeesh and Titman (1993) study of the American market momentum effect using the stock data from1965to1989, this is even longer than the history of the A-share market. While most of the domestic researchers selected samples for about ten years. Discover this phenomenon of mean reversion requires a number of samples. So the study of a-share market momentum effect with the expansion of the sample period is also necessary. |
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