Size Effect And Contrarian Effect

All along,the efficient market hypothesis(EMH)as the Western essential financial market theory,has been widely used in financial market and assets' pricing systems.The Capital Asset Pricing Model(CAPM),Arbitrage Pricing Theory(APT)and the Option Pricing Theory(OPM)are established on the basis of the efficient market hypothesis.According to this theory,stock prices already reflect all the factors that affect the stock price,investors can not get long-term abnormal returns from the market by using some technical analysis methods.However,with the development of financial research,this theory has encountered many questions and challenges.Although our A-share market has experienced the development of more than 20 years and has made some achievements.But compared with the mature markets of developed countries,there are still many problems that make Chinese A-share market present some visions as above-mentioned,these visions are also research hotspots in recent years and many scholars,including practitioners are interested in them.Especially for the exploration and study of the existence and performance characteristics of the momentum effect,the contrarian effect and size effect in Chinese stock market,scholars has reached a number of important conclusions and promoted the further development of financial research.However,these studies have been largely separated studies on the momentum effect,contrarian effect or size effect,there are few studies focused on the contact of contrarian effect and size effect.Therefore,this article focuses on the relationship between size effect and contrarian effect in Chinese A-share market.It is not only a good complement for the vision research of stock market,but also certainly helpful for the study of the effectiveness of Chinese stock market.At the same time,it can help investors to make investment decisions.To investigate this problem,this article chooses all the data of Chinese A-share markets of Shanghai and Shenzhen between January 1,1995 and March 1,2016 for the study,and uses six kinds of formatting periods cross with six kinds of holding periods,then expands the empirical research through screening data reasonably.This paper takes into account the size and yield and uses the method of two-dimension sorts to create 5*5 size-yield portfolios,and then observe the performance of holding period yield of each portfolio.Using the FM cross-sectional regression approach,this paper regress monthly excess returns of stocks on their size and yield variables to study the relationship between size effect and contrarian effect.Then this paper structures hedge portfolio according to the sorts(buy the portfolio which has the smallest size and smallest yield and short the portfolio which has the maximum size and maximum yield)and calculate its yield to decide whether it can significantly improve the yield compared with the yield of hedge portfolio which is structured individually by size groups or yield groups.Then we regress them on Fama-French three factors.Finally,this paper makes the robustness check by changing the formatting period and holding period.This paper finds that there exists short-term contrarian effect and size effect in Chinese A-share market,and when both size effect and contrarian effect exist,they influence the stocks' returns independently;in other words,they can not subsume each other.In terms of hedge portfolios,when taking the size and the yield into account,the yield of the corresponding hedge portfolio is significantly bigger than each yield of the hedge portfolio when only consider size or only consider yield.It means that it can improve portfolios' returns significantly by selecting the stocks that have smaller size and smaller yield at the same time.Finally,the conclusion is proved again with robustness check by changing the formatting period and holding period.The innovation of this paper is:first,it enriches the existing literature.In this paper,empirical studies have examined the relationship between the size effect and the contrarian effect in the A-share market and proved that size and yield influence the returns of stocks independently,at the same time does not subsume each other.However,the previous literature mostly focused on the research of the existence and the corresponding performance characteristics of size effect and contrarian effect,few focused on the relationship between them.Second,the paper has constructed the size-yield portfolios by using the method of two-dimension sorts and then constructed the hedge portfolios;it significantly improved returns compared to the method of one-dimension sorts.It can guide the investors well to invest the stocks and make the correct decision.