Empirical Study On Momentum Effect And Reversal Effect Based On Stock Expected Return

Momentum effect or reversal effect is one of anomalies in financial markets.Since the initial discovery of the anomalies in the U.S.stock markets,scholars have conducted extensive researches in various financial markets,getting specific conclusions on the manifestations and characteristics of momentum and reversal effects in different financial markets,and proposing corresponding investment to traders and investors as well.In recent years,with the sophistication and standardization of China' securities market,some foreign and domestic scholars have been committing themselves to studying financial anomalies of China's A-share market,trying to continuously update the knowledge of asset pricing,behavioral finance and other relevant fields;practitioners such as trader,fund managers,etc.,keep exploring financial anomalies,expecting to get certain profit opportunities.In a variety of financial anomalies,momentum effect and reversal effect have always been the hotspot for both scholars and practitioners.Although the existence of momentum effect or reversal effect has been confirmed in some financial market,the existence and mining methods of the anomaly are still worthy of being studied in emerging markets,such as China's.Based on traditional approach proposed by Jegadeesh & Titman(1993),to detect the momentum or reversal effect,this paper attempted to optimize the research method.When forming the zero-cost portfolio,the ranking was no longer based on the single past cumulative yield,instead on the combination of past cumulative yields of different horizons.The panel data was used to predict the returns in holding period by means of cross-sectional regression,and the predicted returns were sorted in a descending order,forming zero-cost portfolio by buying top 30% stocks and selling bottom 30% stocks.,holding the portfolio for a certain period and calculating the cumulative returns.The empirical results showed that this method can detect the significant reversal effect in China's A-share market and has certain practical significance.Furthermore,this paper explained the reasons behind the reversal effect in China's A-share market,on the basis of perspective of risk compensation and the behavioral finance in the irrational framework.The results showed that under the rational framework,the excess returns of portfolios are still non-zero significantly after the adjustment of risk factor,indicating that the reversal effect is not due to bearing the additional risk;under the irrational framework,according to BSV model and HS mode,the investors tend to overact to policy news and specific information,and the overall overreaction of market is dominated by individual investors.Finally,a new reversal factor was constructed based on the characteristics of the reversal effect of China's A-share market,and added to the current three-factor model.The empirical results showed the reversal factor can assist to improve the interpretation to returns.The innovations of this paper lie on the following three aspects: A.Apply an innovative approach to explore the momentum and reversal effects on China's A-share market;B.Divide the investors into institutional investors and individual investors in the explanation of the reasons behind the reversal effect,and study which type of investors dominate the market reaction;C.Form a reversal factor and try to improve the interpretation of pricing model.