Analysis Of Enhanced Price Reversal Strategy Based On Evolution Of Historical Prices

Reversal effect has always been the focus of attention in the investment and academic circles.Some investment strategies that integrate the idea of inversion effect have achieved wonderful returns.The perforamance of inversion factor in the market has also been an important reference index for analysts.Moreover,because the reversal or momentum strategy can achieve a certain degree of excess returns in most global markets,and many classical and prevailing stock pricing theoretical models could not fully explain it.Therefore,scholars continue to study from different perspectives,such as the existence of the reversal effect,the reasons for its occurrence,and the improvement of the reversal trading strategy.A large number of domestic and foreign studies show that Chtina's stock market is less effective than that of developed countries in Europe and the United States,and there is a significant reversal effect in the medium and long term.This paper starts from the technical analysis behavior of investors in the market.Based on the trading data of A-share market from January,2007 to January,2017.Constructing Price Trend Factor(TP)to describe the price trend characteristics of stock in the past period of time and distinguish the stocks with obvious upward and downward trends.When the sign of TP is positive,it means that the trend of stock price shows a downward convex pattern in the upward trend or A downward convex pattern in a downward trend.When the sign of TP is negative,it means that the stock price trend shows the upward convex form in the upward trend or the upward convex form in the downward trend.Traditional reversal strategies use cumulative returns over a period of time to eharacterize the extent to expected returns,however it's hard to control in the oscillation interval.Using TP factors to identify past trends,and find out stocks that are oversold or in extreme markets condition.On the premise of traditional reversal effect,TP factors make contribution to strength the extent of expected reversal and improve the traditional reversal strategies by holding stocks with strong rebound and weak sell-off.After the study,the following conclusions are drawn:(1)TP factors can achieve the long-short gains both in the winner group and loser group,and it can effectively describe the stock price trend.In statistical analysis,the first and last groups g9*ouped according to the value of TP factor have opposite symbols,it shows that there are obvious differences in the trend of stock prices between the two groups.In the winner portfolio,when the formation period is 3,6,9 and 12 months,the returns of the long-short portfolio are significant in most holding periods,indicating that the stock that accelerated the rise in the past has stronger reversal effect in the future.In the loser portfolio,when the formation period is 3 and 6 months,the return of the long-short portfolio is more significant,indicating that the stock which accelerated the decline in the past has stronger reversal effect in the future.(2)Accelerated inversion strategy can significantly improve the performance of traditional reversal strategy,while decelerated inversion strategy can not improve the performance of traditional reversal strategy.The accelerated winner portfolio is defined as the group with the highest TP factor value in the winner portfolio.The deceleration winner portfolio is defined as the lowest TP factor in the winner portfolio.The accelerated loser portfolio is defined as the group with the lowest TP factor value in the loser portfolio.The deceleration loser is defined as the group with the highest TP factor value in the loser portfolio.The accelerated reversal strategy increases the excess return of the traditional reversal strategy by about 71%and Sharp's ratio by about 45%.After adjusted by Eama-French three-factor model,the excess returns increased by about 106%.Deceleration reversal strategy has no improvement effect.(3)TP factor has a predictive effect on future earnings,after Fama-Macbeth regression test,TP factor has great predictive ability in the whole sample and winner group,but not in the loser group.(4)Aftertime-series regression and control variable test,the results show that the return of accelerated reversal strategies cannot be fully explained by the return of traditional reversal strategies and other types of reversal strategies,however,the return of accelerated reversal strategy and 52-week high-price strategy have strong explanatory power to the return of traditional reversal strategy.(5)Combining Behavioral Finance Theory to analyse the reasons for excess return of accelerated reversal Strategy.On the one hand,investors overreact due to unexpected events,on the other hand,extrapolation bias causes stocks are oversold.This paper provides a reference for the research based on price pattern and investors' market behavior.Combining the information of overreacted and oversold stocks by market participants,and constructing a enhanced reversal strategies.TP factor has a predictive effect on future earnings,and providing a new reference angle about constructing the portfolio.Reversal effect is in the A-share market,it means that historical pricing,trading practices and disclosure of basic information are not fully reflected in the market,stock prices are over-reacted in the short run and will show a reversal trend in the future.Accelerated reversal trading strategy further differentiates stocks,strengths cognition of stock price trend extrapolation,and expects to get trending return.The discussion of reversal effect in this paper is of great significance in practical investment,on the one hand,the predictive role of TP factors can provide investors with information on the trend of stock prices in the future,on the other hand,the new reversal strategy improves the traditional reversal strategy,and has a guiding role in the construction of portfolio and trend tracking.