Research On The Reversal Effect Of Stock Market Based On Momentum Factor

The reversal effect of stock market means that the return of stocks with low historical returns will exceed that of stocks with high historical returns in the future.In the efficient market hypothesis,this phenomenon does not exist.Even in the weak efficient market,the stock price contains historical price information.However,investors are not rational.Investors' irrational behaviors,such as overreaction,overconfidence and pursuit of ups and downs,exist objectively.This paper analyses the momentum effect of A-share market in China from May 2005 to August 2018.On this basis,a multi-factor asset pricing model with momentum factor is constructed.The applicability of the asset pricing model is tested and the stock market reversal effect is analyzed.In the first part of the empirical study,by calculating the difference of return between winner's stock portfolio and loser's stock portfolio in different periods of week,month,year and holding period,we find that there is inertia effect in two to three weeks and reversal of return in three to six months.The margin trading system can restrain the momentum effect of the stock market.On this basis,the momentum factor with four months as the formation period and one month as the holding period was constructed by referring to Fama-French method.In the second part,we select market risk factor,scale factor,book-to-market ratio factor,profitability factor and momentum factor as effective factors to construct four nested asset pricing models by using intercept term and square sharp ratio as indicators.In the empirical test of asset pricing model,we construct 125 portfolios to test the model.We find that the four-factor pricing model with momentum factor is superior to the three-factor pricing model and the four-factor pricing model with profitability factor.The goodness-of-fit difference between this model and the five-factor asset pricing model is not significant.After the implementation of the margin trading,the explanatory power of the asset pricing model has greatly improved.At the same time,the asset pricing model has a good explanation for the reversal effect of the stock market.Empirical tests show that the earnings of the winner portfolio mainly come from market risk and scale premium,while the book-to-market ratio effect and momentum effect may have a negative impact.The loser portfolio gets significant positive earnings from momentum factor and book-to-market ratio factor in addition to market risk factor and scale factor.The robustness test shows this effect is stable.Therefore,the return of the loser portfolio is inversely higher than that of the winner portfolio,which produces the reverse effect.