The Timing Of Stocks’ Highest Price During The Past Weeks And Momentum Strategy

As one of the most important anomalies, the momentum in past years arises the attention of the scholars and the investors. However, their study focuses on the existence, the reasons of the momentum and the adjustment of the momentum strategy. With the development of the behavior finance, more scholars study the behavior of the investors from the aspects of the psychics. With the consideration of the investors’psychological activity, the scholars adjust the traditional momentum strategy to find some deep theories. Specifically, some foreign scholars focus on the anchoring effect and the recency effect to find out its effect on investors’behaviors. By constructing the new index with the consideration of the timing of the highest closing price during the past weeks, they can form the momentum portfolio and follow the new momentum strategy to get the abnormal return in the U.S. stock market. However, the research on this area does not arise the attention in China.Based on the stock trading data during January 1st 1995 to December 31rd 2014, the adjustment of the momentum strategy will be formed by considering investors’ behavior of the anchoring effect and the recency effect.. Considering that the volatility characteristics of U.S. stock market and Chinese stock market is different, the U.S. stock market volatility characteristics show that the period of the bull market is long and the period of the bear market is short, while Chinese stock market is characterized by the period of the bear market is long and the period of the bull market is short, and that many investors judge the long-term trend of the stock based on the 120-day average line, we form the index based on the past 26 weeks.Firstly, considering the recency effect, we form the RR index based on the timing of the highest price during the past 26 week. Stocks will be grouped based on the RR index and the winners and losers will be constructed. With the strategy of buying winners and selling losers, we consider the returns in the holding period of the 1,3,6,9 and 12 month. Secondly, the GH index will be constructed based on the highest price during the past 26 weeks. We follow the momentum strategy based on the GH index to study the portfolio returns in the holding period. Finally, we will group the stocks based on these two indexes and follow the momentum strategy to study the portfolio returns in the holding period. The comparison of the momentum returns based on the RR index, the GH index and both the RR index and the GH index will be given in this part. At the same time, the predictability of the RR index, the GH index and the common predictability of the RR index and GH index will be tested based on the FM regression.Based on the empirical study above, the conclusions have been reached. Firstly, in the short term, the momentum strategy based on the RR index can get good profitability. The earning with the holding period of 1 month is 0.56%. At the same time, it is significant at the 10% level. In the medium term, the momentum strategy based on both the RR index and the GH index can get the significant positive return. What’s more, with the holding period of the 3,6,9,12 month, the earnings of the momentum strategy based on the GH index are 0.57%,0.64%,0.58% and 0.46%, which is higher than the earnings of the momentum based on the RR index. Secondly, in the short and medium term, the momentum strategy based on both the GH index and the RR index can get better profitability. What’s more, with the holding period of 3,6,9 and 12 month, the return is higher than the momentum strategy based on these two indexes independently. The earnings are 0.73%,0.69%, 0.62% and 0.50%, and are all significant at the 1% significant level. Thirdly, the result based on the FM regression shows that the RR index and the GH index have some certain predictability, and the common predictability of both indexes is stronger than the results based on these two indexes independently. It offers a strong proof for our results before.In summary, the momentum strategy based on the RR index in short term and based on both the RR index and the GH index in the medium term can help to reach a high return. Our research offers a good guidance for the investors in A-share stock market in China.