| The discovery of momentum effect and reversal effect means that stock prices has a trend and can be predicted, which conflicts with the Efficient Market Hypothesis. As one of basics of the traditional finance the Efficient Market Hypothesis believes:investors are fully rational, transactions are randomly occurring and investors can arbitrage without risk infinitely. However it’s hard to explain the momentum effect and the reversal effect by the Efficient Market Hypothesis. Behavioral finance combined with the psychology and other disciplines relaxes the assumptions of the Efficient Market Hypothesis. Human’s bounded rationality, crowd behavior and incomplete market are three fundamental assumptions of Behavioral finance. Behavioral finance which successfully explained momentum effect and reversal effect think it was the result of human cognition and behavior bias in decision-making which makes investors made irrational behavior, so that the stock price appears short-term momentum and long-term reversal. Of course, such deviation caused by momentum effect can’t last all the time, the rational investors will fix this error after excessive deviation and reversal effect make price return to the intrinsic value gradually.Industry momentum effect is one kind of momentum effect. It’s the industry market returns have the trend of the original direction of movement. It is widely known that investing behaviors shows the characters of pursuing rises&killing falls. The momentum characters of the market also display the tectonic plate wheel move and strong permanent is strong permanently. This promted us to conduct in-depth research and analysis about all kinds of momentum effect in Chinese market. When compared to the foreign mature market, Chinese stock market has its own characters, such as relatively short history, strong speculation, trading rules and regulation is still not perfect. In such a changing market, the stock markets in China and abroad have similarities as well as difference. After reviewing the papers written by domestic scholars, we found that more studies focused on individual stocks, and the choice of the holding period and the formation period is just a direct copy of basic research methods introduced by Jegadeesh&Titman. Due to the different time span and stocks included, there is no uniform conclusion.This paper is based on the overseas research methods, mainly focusing on the industrial index (using the weekly data from April6,2001to April3,2013), trying to analyze the industrial momentum strategies. The result shows that the short-term momentum effect does exist in China’s A-stock market. And after eliminating industry factors, we find that industry factor is indeed the dominant source of industry excess return, and there is on industry concentration when implementing the strategy. We also analyzed the effects of some factors on the industry momentum effect, such as interval and market trends. The results show that industrial momentum effect in China’s A-stock market is very sensitive to the market situation:there is a significant momentum effect in a bull market, investors can achieve significant excess returns using the industrial momentum strategy.At last, we discuss the source of industry momentum effect from the perspective of Behavioral Finance Theory. We analyze the structure of investors in the stock market, the behavioral characterize of the investors and the non-efficiency of the market which can influence the industry momentum. We find that Active government will often introduce some industry policies, and institutional investors will focus on those industry policies to make industry allocation strategy, but individual investors tend to follow those institutional investors. As result, the industry index can show a kind of inertia which is industrial momentum. |
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