Empirical Analysis On Momentum Effect Under The Background Of Coming Stock Option

Efficient Market Hypothesis indicates that the price of a security has reflected the information and there is no way for investors to get extra interest by trading with news. However, the price anomalies such as momentum effect, reversal effect, calendar effect challenge the EMH. Momentum effect is a phenomenon that if a stock did well (bad) in the past, it will do well (bad) in the future. In constructing a momentum strategy, we need sell short the loser portfolio which cannot be done in China market. But as the stock option is coming, the situation will change.In my article, first I introduce the concept and restrictions on EMH and through the introduction of price anomalies I demonstrate the limits of traditional finance. The appearance of behavioral finance explain price anomalies such as momentum effect.And the I did the empirical study on the momentum effect of A share. I divided the total stock into 3 parts, the start-up board, small and medium board, and the blue stock. And in the bull, bear and full stage separately I did the empirical work. And I reached 3 conclusions:first, the start-up board and small and medium board have more significantly momentum effect than that of the total A share and the blue stocks; second, when the J or K reach 12, the momentum effect disappeared in the start-up but still exist in the small-and-medium; third, when the market is bear, the momentum effect is more significant.And, I summarized that China stock market differentiates from the developed market in 3 aspects:the low proportion of constitutional investor, serious speculation atmosphere and a lack of shorting tools. And through extending the HS model proposed by Hong and Stein, I introduced a new role of investor, the technical news trader. Those kinds of traders are just the hedge fund firms in China. And they have the news and they master the technical analysis.In the last part of my article, I gave empirical analysis on the reasons of momentum effect, bringing the momentum factor into the FF3 model to form a FF4 model and see if the R2 has increased or not, consideration of trading fees.