Research On Momentum And Reversal Effects: Based On Two Ways Of Measuring Portfolio Returns

Since the 1980s, a large number of empirical studies have found that some phenomena were difficult to explain by the efficient market theory, among them, the momentum and reversal effect is one of typical vision. At present, scholars have done many researches, but there was no consistent conclusion. Comparative analysis of existing literature, one common thing is that they are all involved in the calculation of portfolio returns in the empirical test. However, there is no clear unified calculation formula. This paper combines with Liu (2008) to comparative analysis of rebalanced method and buy-and-hold method, and inspects the existence of momentum and reversal effect in Chinese stock market based on these two methods. To discuss the influences of ways of measuring portfolio returns on momentum and reversal effect.First, this paper analyzes the measurement principle of rebalanced method and buy-and-hold method and discusses the differences of these two ways theoretically, then selects the monthly transaction data of A-shares listed on the Shanghai and Shenzhen Stock Exchange during the period of 1995.1-2013.12 as research sample, adopts the overlapping method to construct zero-cost portfolio, respectively with the buy-and-hold method and balanced method to calculate the average monthly return of each portfolio, to inspect the influence of empirical conclusions based on these two ways. The main conclusions include:buy-and-hold method is more scientific and accurate, rebalanced method against the basic assumption of the construction of portfolio, to produce bias to portfolio returns; For the specific strategy of each zero-cost portfolio, compared to the buy-and-hold method, the rebalanced method produces a downward bias to momentum and reversal effect. To strategies, for example, [6,6], [12,9], buy-and-hold method and rebalanced method have produced different conclusions respectively, imprecise measurement method lead to incorrect statistical inference; The empirical findings confirm that there was no obvious momentum effect in Shanghai and Shenzhen Stock Exchange, while, in the medium and long term, these stocks showed an obvious reversal effect based on precise buy-and-hold method.Chinese stock market is a newly-established market, so the research on momentum and reversal effect is help to test the effectiveness of the financial markets, and the paper studies on the ways of measuring portfolio returns to enrich the literature of the empirical test to momentum and contrarian effects. At the same time, this research is help to regulate the measurement method of portfolio return and makes scholars research more accurately, overcome the shortcomings of rebalancing, scholars can be more accurate to study the relevant research based on the buy-and-hold.