Research On Reverse And Momentum Effect Based On Trend Recognition

The Efficient Market Hypothesis(EMH)is the basis of standard financial theory,the hypothesis thinks that stock prices reflect all relevant information,and we can't predict the future price changes direction from the history of stock prices.However,a large number of empirical studies show that there are many "market anomalies" in the stock market that violate EMH.Among them,the momentum effect and reversal effect are two typical kinds,which respectively reflect the different reaction of share price to information,but the expression form varies with time and country.Most domestic scholars have studied the momentum effect and the reversal effect only to consider the historical yield of the stock in a single way,instead of focusing on whether the stock is strengthened or weakened in the near future.Therefore,based on the stock return data from January 2005 to December 2015 in A-share market,this paper firstly introduces the trend salience method into empirical study of momentum or reversal effects in China,aiming to explore the relationship among trend salience,reversal effects and stock return predictability.This paper first introduces the vision of financial market,and narratives this vision from traditional finance theory and behavioral finance theory.Then we use empirical analysis method to compare the traditional inversion trading strategy and based on the income effect of the reversal of the trend identification trading strategy,and explain excess returns of two strategies through the Carhart four factors model.The results show that:(1)Reverse trading strategy has stronger applicability in Chinese stock market.Unlike the mature stock market in western countries,there is no momentum effect in China's a-share market,but it shows A significant reversal effect,so it is often more profitable to reverse the trading strategy.(2)Reverse trading strategies based on trend identification can bring more significant excess returns to investors than traditional reversal trading strategies.We combine trend identification method,stock will be historical earnings trend decomposition,buying declining trend to strengthen the loser portfolio and selling upward trend to strengthen the winner portfolio in order to build the reversal of the trend identification based trading strategies,the results based on the reversal of the trend identification trading strategies than the reversal of the traditional trading strategy higher excess returns for investors in the future more and more prominent,persistent.(3)Based on Carhart four factor model,this paper uses historical yields as reversal factor and market value and bookvalue than risk factors as explanatory variables to construct the four factors pricing model with Chinese characteristics.We find that the four-factor model can explain the return reversal phenomenon of Chinese stock market to a higher degree,and its explanatory strength is significantly higher than the Fama-French three-factor model.The results of this paper are of great significance to the discussion of the effectiveness of China's stock market.On the one hand,enrich the domestic research in the field of the momentum effect or reversal effect research results,also open a new angle for the research of the momentum and reversal effect,thus to some extent,promote the stock market micro-structure theory and the development of behavioral finance.For investors in the capital market,on the other hand,provide the policy basis,investors focused on stocks of historical returns at the same time to analyze the trend of the formation of the final is particularly important,based on the reversal of the trend identification strategy can bring more arbitrage opportunities to investors.