Momentum Effect In Chinese Market, Related Trading Strategy And Its Predictability

The drastic volatility in the stock market indicates that the Efficient Market Hypothesis is not the case and the investors believe the price of stock is predictable and they have their methods. There is a lot of "Anomalies", like "Accrual Anomaly" and "Investment Anomaly" in the market, and "Momentum Effect" is one of them.20 years have passed and recent literature indicates that the Momentum Effect still exists in the market. Ever since then there is no consensus opinion about the cause of Momentum Effect:a lot of literature shows that Momentum Effect could not be explained by classic finance theories like CAPM or Fama-French Model; more scholars inclined to believe the Momentum Effect is caused by so-called "Overreaction" or "Underreaction" in behavioral theory.This paper uses the method by Jegadeesh and Titman (1993) to study the Momentum Effect in Chinese market. Besides, we study the influence of time, industry, size and Beta on the Momentum Effect in China. We conclude that there is Momentum Effect in China and the lack of Momentum Effect defined by Jegadeesh and Titman is due to the lack of short mechanism, and size, Beta and Underreaction have strong explanation power over the Momentum Effect in China. Finally we study the predictability and profitability of momentum trading strategy in China and we tend to believe ARIMA model could strongly predict the return of momentum trading strategy and avoid the loss.The contributions of this paper are:(1) we study the effect of different variable on the Momentum Effect in China in Detail (2) we use Fama-MacBeth regression instead of simple linear regression to determine the explanation power of CAPM (3) we study the predictability and profitability of momentum trading strategy elaborately.