Idiosyncratic Momentum Effect In China's A-Share Market

The momentum strategy which has been widely used in stock investment practice is a kind of stock investment strategy which predicts the stocks' future returns through its previous returns.Many empirical studies have shown that most regions of the stock market,such as the United States,Europe and so have momentum effect.For the question of whether Chinese stock market has a momentum effect,most studies have come to a negative conclusion,only a few studies show that the Chinese stock market has a momentum effect.Most domestic scholars have shown that there isn't significant momentum effect but obvious reversal effect in the Chinese stock market.Many foreign scholars have made improvements and innovations on the basis of traditional momentum,such as fresh momentum,absolute momentum,relative momentum,residual momentum and so on.Based on the capital asset pricing model(CAPM),this paper constructs the idiosyncratic momentum,tests whether there is momentum effect in the Chinese A-share market,and compares the idiosyncratic momentum with the traditional momentum.In this paper,we use the stock transaction data of China A-share market from March 2006 to March 2016 to obtain the residual sequence by returning to capital asset pricing model(CAPM),and then use this residual to construct a new momentum strategy.Compare the effect of this idiosyncratic momentum strategy and the traditional momentum strategy in the Chinese stock market;it is found that the idiosyncratic momentum strategy can get excess return on the stock market,while the traditional momentum strategy has short-term reverse effect.Even in the case of not allowing short selling,investors can use this particular form of momentum to select the winners' portfolio,gaining more than the expected return by buying the winners.At the same time,the sharp ratio of idiosyncratic momentum strategy is larger than that of traditional momentum strategy,which indicates that the high return of idiosyncratic momentum strategy does not come from high risk,and its high return cannot be explained by Fama-French three factor model.