Analysis Of Enhanced Price Reversal Strategy Based On Earnings Momentum And Revenue Momentum

The efficient market hypothesis is a cornerstone of traditional finance. But these years there are some market anomalies which are against the efficient market hypothesis being found. These market anomalies consist of January Effect, Momentum effect, reversal effect and so on. At the same time the Chinese stock market is not a completely efficient market. Under this background the paper draw a conclusion that Chinese stock market has the reversal effect which is based on stock price of history. The sample data is Shanghai and Shenzhen stock of 20 years from 1995 to 2014.We did the study used the listed company company’s financial data, such as earnings per share and revenue per share, and market data, such as historical price. Besides, we constructed the standardized unexpected earnings(SUE) and standardized unexpected revenue growth(SURGE) by an innovative use of quarter earnings per share and revenue per share in the financial statements.The paper suggests that there are earnings momentum effect and revenue momentum effect based on listed company’s financial information in Chinese stock market. Based on the existence of market anomalies we try to surplus earnings momentum and revenue momentum into the price reversal strategy, in order to improve the performance of price reversal strategies.Follows are several conclusions of our research. Firstly, Chinese stock market has a short-term reversal effect. In a relatively short period of time (usually 1 to 3 months),investors can get excess returns in the future by buying the loser portfolios at the same time selling the winner portfolios, which shows that the reversal effect exists. Secondly, there exist an earnings momentum and revenue momentum in Chinese stock market. Through constructing SUE and SURGE, then buying investment portfolios whose SUE or SURGE are the biggest, while selling those who has the smallest SUE or SURGE, investors can get excess returns in the future as well. It suggests that there exists earnings momentum and revenue momentum. Thirdly, price reversal strategy is profitable in Chinese stock market and this has been supported by many empirical evidences. But studies on how to improve the performance of price reversal strategy are relatively rare. In this paper, basing on the test on the existence of price reversal effect, earnings momentum effect and revenue momentum effect, we try to introduce earnings momentum and revenue momentum into the price reversal strategy to improve the performance of the latter. Our empirical results show that earnings momentum and revenue momentum can significantly improve the performance of price reversal strategy. On the basis of Fama-French three-factor model, the risk-adjusted returns alpha of the enhanced price reversal strategy are increased by 66% and 81% when separately introducing earnings momentum and revenue momentum. While the risk-adjusted returns alpha is increased by 126% when simultaneously. Last but not least, aside from academic interest, the aforementioned findings may well serve as useful guidance for asset managers seeking profitable investment strategies.The results of this paper have the vital significance towards the discussion on the effectiveness of Chinese stock market. History information of the stock market portfolio can predict future earnings, which means that the price of the stock information and fundamental information are not fully reflected in the market, In terms of reversal effect, there is a phenomenon that the price of the stock does not accord with the intrinsic value. Under-reaction or excessive-reaction in the short term is largely seen as the process of price being digested steadily. In terms of earnings momentum and revenue momentum, the company fundamentals information is not fully reflected in the share price. PEAD phenomenon indicates that share price reaction to the company’s fundamental information has a certain delay, resulting in that SURGE and SUE has certain prediction effect to the stock prices in the short term trend in the future. Understanding and discussing momentum and reversal effect is not only of great significance in theory, but also helpful in guiding the investors to. invest effectively.