A Study Of Momentum Based On Co-movement

While style investor make their invest strategy, they usually first classify stocks first according certain criteria before and then make their choice among different kind of stocks. Style investors play an important role in financial market. Style-based investing is responsible for asset return predictability to some extent, which works as a bright idea for asset pricing, risk control as well as the innovation of financial product. Not only style investing enhances the asset-level momentum, it also generates style-level momentum among. Such momentums bring great chances for both technical traders and arbitragers. The co-movement between individual asset and their styles also works as an important factor for future asset return. Those individual assets which possess high co-movement with their styles may have greater chances to gain high return. Based on above study, this paper combined co-movement and traditional momentum to test the return of corresponding trade strategy. The data this paper use is mainly on Chinese A stock market.The contents of this paper are as follows:the first part mainly studies the predictability of style returns generated by style invest behavior; the second part an; the second part analyses the co-movement between individual asset and the style it belongs to; the third part calculates the return of invest strategy based on co-movement and compare the result with the traditional one.Based on empirical study, this paper draws the following conclusions:first, the style return based on B/M and SIZE generates predictability for future return, especially when the holding period is6month; second, the co-movement also has impact on stock return. Because of style-level momentum, usually those stocks with high co-movement are more likely gain high return while the low co-movement stocks gain low return; third, investors who hold a co-movement-based strategy has greater arbitrage space than those who invest just based on traditional momentum strategy.This paper uses the history returns and co-movement to make empirical test. There are two methods to sort stocks into different groups, one is sort independently and the other is not. Chances are that the number of stocks is totally different in different styles; even some are empty ones, which may cause the result not robust. This paper use both method to sort stocks, and the final result is just the same. Another factor that may make the result not robust is the market situation. To avoid such factor, this paper makes a further test in different kind of market, namely bull market and bear market with November,2005as the dividing time. The result is also robust. The above tests mean that the style investing strategy could improve traditional momentum. If investor buy stocks with high co-movement and high returns while sell stocks with low-co-movement and low returns, he could gain more extra returns,...