The Empirical Study On Momentum And Reversal Effect Of Shenzhen Small And Medium-sized Enterprise Stock Market

Efficient Market Hypothesis is the foundation of modern economics, it is proposed based on the hypothesis that all the investors are rational. EMH states that all the information in the market can be got with no expense, and the price includes all the information, so no one can get exceeded return. According to the degree of efficiency, Fama divided the market into three, weak efficient form, semi-efficient form and the strong form.However, with the deepening of the research, an increasing number of scholars find that the EMH cannot fit the fact well. Firstly, not very investor is rational, numerous noise trader exist. Secondly, the result caused by irrational trading cannot be eliminated by random trading. And a lot of anomalies have been found that none of them can be explained by EMH.Momentum effect and reversal effect, the two phenomena this paper will study are belonging to those market anomalies that going against EMH. Momentum effect indicates a situation in market that the tendency of stock price will last for a period of time, and reversal effect indicates another phenomenon that the tendency of stock price will flip. So based on these two effect, we can build two different strategy to obtain exceed profits. One is called momentum strategy that is to buy the winner portfolio and sell the losers. Another is called the reversal strategy that is to buy the loser portfolio and sell the winners. De Bondt&Thaler (1985) did the research on NYSE with the dealing date from year1926to year1982and found reversal effect exists in American stock market. Jegadeesh and Titman found momentum effect in American stock market by studying the data of NYSE and AMEX from1965to1989in1993. Then, growing number of attentions have been paid to this field and explaining these two market anomalies. The most widely accepted theory is the under-reaction and over-reaction theory, it is always believed that momentum effect is caused by under-reaction and reversal effect is caused by over-reaction. In our country, it is widely accepted that momentum effect exists in the short period and reversal effect exists in the medium and long term. But the majority of domestic researches have been focused on the Main Board, the Shenzhen Small and Medium-sized Enterprise Stock Market this paper will discuss is rare. However, the Medium and Small Listing Companies Market has already been a crucial part in China’s stock market, besides, the Medium and Small Board has its own distinctive features that differ from the Main Board. Thus, it is of great importance and necessity to study the Medium and Small Board as a unique object.This paper will use the way Jegadeesh&Titman test the momentum effect in American market to do the research on China’s Medium and Small Board. The result shows that in the Medium and Small Listing Companies Market exists momentum effect vastly and reversal effect in a very short term(within one week), and we will use the modified HS model to explain this phenomenon.