Empirical Research Of Momentum Effect Based On CSI300Index Constituents Under Different Market Conditions

Momentum and reversal effect are so far the most confusing’anomalies’ on stock market. The explanations and research in these two phenomena directly contribute to the emergence and development of behavioral finance theory. In the past literatures on momentum effect, the research objects were mainly focused on the mature markets such as European and American stock markets. Empirical studies were quite few for securities markets in developing countries, especially in emerging markets like China. Therefore, the researches on emerging markets are more conducive to the development and extensiveness of the research results in this field.At first, this paper gives a general introduction from the perspectives of research background of behavioral finance, the proposition of momentum effect and the significance of research. It summarizes the representative domestic and foreign literatures on the discovery, validation and causes of momentum effect. In order to investigate the performance of momentum effect under different market conditions, it divides the trend of stock market in the sample period. In considering the trend of CSI300stock index, it uses the method proposed by Pagan and Sossounov (2003) and makes some improvements on this method. It divides the trend of CSI300into three kinds of market conditions, which are bullish market, range-bound market and bearish market through four steps.Secondly, this paper builds upon Carhart’s (1997) four-factor model with portfolio level returns and creates a four-factor model with firm-level returns. Due to the panel data, different individual effects of every firm need to be considered to minimize bias. LSDV is used to analyze the fixed effect in the panel data. In the empirical part, we focus on comparing the performance of momentum effect under bullish market, range-bound market and bearish market. In order to analyze the causes of momentum effect, we use turnover ratios, earnings per share (EPS), monthly tradable market values and book-to-market ratios of CSI300index constituent stocks as the proxies for investor sentiments, firm earnings, firm sizes and types of listed companies to study the causes of momentum effect.Finally, we give a conclusion and some suggestions on investors’ investment strategies and the operation and supervision of securities market in two aspects which are the micro-participants and macro-environment. We point out the deficiencies of this paper and give some specific directions for further research.