Momentum Effect,Reversal Effect And Evolutionary Market Hypothesis

The efficient market hypothesis makes the foundation for modern financ ial theories.This hypothesis emphas izes the timely reaction in market to information in which market investors could not profit,nor coud momentum and reversal effects appear.But empirical analysis shows something d ifferent.Fama(1998)once considered that momentum and reversal effects might be derived from the model problem.Based on this idea,we try to use different models to test these effects.Imitating the method of Jegadeesh and Titman(1993),the winner groups and loser groups are established.Based on monthly data and weekly data,the total return?the 3 factors residual return and the 5 factors residual return are used to test the momentum and reversal effects.The empirical results show that different time span or different model often means different results,which means these effects may b e affected by time span and model selection.Also time series analysis is employed to analyze the return series of monthly and weekly investment groups.Although these groups both show reversal effect,we cannot make use of this anomaly to get higher retur n.This may be caused by extreme downside risks.From the ARMA model,the coefficients of lagged returns and lagged residuals are always different from each other,such as one positive and the other negative,vice versa.This phenomenon may imp ly the reverse adjustment of return series.Then the evolutionary market hypothesis is proposed to discuss whether the market is effic ient or not.The hypothesis holds the idea that the market is dynamic and evolutionary with many qualitative and quantitative changes.The momentum and reversal effects are only one side of the market.This paper point out that momentum and reversal effects both exist in market.Different methods and different models may help us find different s ides of the market.The effic ient market hypothesis depicts the final picture of evolutionary market.