The Restudy Of Reversal And Momentum Effect

We choose the stock of A shares in Shanghai and Shenzhen market from January 2006 to December 2018 to study the reversal and momentum effect in our market.Different from many former studies,the winner portfolios and loser portfolios formed in the study are not only determined by the stock returns in history(CRET).Since we choose the jump component in the stock returns as the proxy of information shocks,we also form the portfolios based on the stocks' cumulative jump returns(CJR).Our study indicates that there exists significant monthly reversal effect in our market,no matter the portfolios are formed by CRET or CJR.We discover that the five-factor model could explain most reversal returns formed by CRET,but has little power in explaining the reversal returns formed by CJR,Then we try to figure out whether investor irrational behavior exists under information shocks.We choose the trad:ing volume as the proxy for investor attention.The empirical test indicates that investors do overreact under information shocks.When stocks experience positive information shocks in the forming period,the overreaction pushes the stock price to rise beyond where it should be.As time passes,the price falls.When stocks experience negative information shocks in the forming period,the overreaction pushes the stock price to fall below where it should be.Finally,the reversal effect comes out.After controlling for other firm characteristics,the relationship between CJR and holding period returns is significantly negative.So is the relationship between CRET and holding period returns,but with a less significant and bigger coefficient.Noticing that the coefficients are negative,the difference in the significance and magnitude of the coefficients coincides with the characteristics of the risk-adjusted returns of the two reversal portfolios.Our research enriches the study of the reversal and momentum effect in our market.It enables investors to have a better understanding of our stock market and provides inspiration on how to better guide investors to make more rational trading decisions.Also,it has certain practical values in the healthier development of our stock market.