Liquidity Risk Management Of Momentum Crashes And Its Promotion In The Chinese Market

Momentum strategy is one of the most classic and commonly used investment strategies in the field of quantitative investment and is the basis of many in-vestment strategies.Momentum strategies,however,have a huge yield pullback when the market turns from a bear to a bull.Foreign scholars have named this phenomenon " momentum crashes".Momentum crashes phenomenon widely ex-ists in all kinds of assets and markets,which greatly damages the interests of investors.Through the research of momentum strategy,scholars find that the market state,volatility and liquidity risk are closely related to the return of momentum strategy,and have proposed various improvement strategies such as time series momentum and momentum factor stopping-time.However,most of the existing improvement strategies are based on volatility risk and market conditions,and less on liquidity risk.Attention should be paid to the research in this field.Based on the research status and research methods of JFE and other top fi-nancial journals at home and abroad,the research contents of this paper mainly include:I.The existence of momentum crashes in the Chinese market;?.Corre-lation between momentum return and various factors in crashes and non-crashes periods;?.How to use liquidity risk to improve momentum return;IV.Whether the method of improving momentum crashes can be extended to the reversal s-trategy.The research data in this paper were taken from A-share listed stocks from January 2000 to October 2019.This paper mainly analyzes the combined momentum strategies(1,1,1)with a formation period of 1 week,a holding period of 1 week and an interval of 1 week.By calculation,when the momentum crashes occurs,the market state is mainly dominated by the sudden bull market after the bear market,with high volatility and low liquidity.In addition,the regression coefficients of volatility and momentum return is negative,and the regression coefficients of liquidity risk is positive,which verifies the negative contribution of high volatility to momentum return and the positive contribution of low liquidity to momentum return.Based on the existing literature,this paper combines the volatility adjustment model and the factor stop model,and builds a liquidity risk smoothing method(model El-2 based on illiquidity factor Illiq)to adjust the momentum crashes phenomenon.After testing,it was found that the method significantly improved the momentum crashes situation,increasing the cumulative final value from 0.77 yuan to 5.04 yuan(starting from 0.77 yuan),reducing the maximum rebounding from 64.94%to 20.63%,and increasing the sharpe ratio from-2.18 to-1.67.Momentum strategies and reversal strategies are selected in the same way,switching between each other during investment.For this reason,the concept of momentum crashes is extended to the reversal strategy and called reversal crashes.In fact,because momentum crashes theory actually studies the market performance of the worst-performing periods of momentum returns-that is,temporary periods of reversal-this paper extends the concept.by analogy on the basis of the study of momentum crashes.In this paper,the combined reversal strategy(12,0,12)with a formation period of 12 weeks,a holding period of 12 weeks and an interval period of 0 weeks is analyzed.After calculation,the crashes of the strategy is generally in the sustained bull market or bear market,that is,the market is in a unilateral upward or downward state.And through the coefficient of variation(CV)of logarithmic turnover and the CV of logarithmic turnover,it is found that the time when the strategy return and logarithmic turnover CV have a greater correlation is earlier than the time when the logarithmic turnover CV has a greater correlation,which further indicates that the time of crashes is located in the bull market(bear market)started by the banker.At the same time,the regression coefficient of volatility factor and lagging 1st order of strategy return is significantly greater than 0,and the regression coefficient of liquidity factor and lagging 1st order of strategy return is significantly smaller than 0.indicating that volatility has a positive contribution to strategy return,while liquidity has a negative contribution.The liquidity risk improvement model based on momentum strategy also im-proves the return of reversal strategy.Model El-1-2 based on Illiq factor sig-(?)nificantly improved the strategic return,raising the final cumulative return of the initial investment of 1 yuan from 2008 to 8.31 yuan,reducing the maximum retracement from 24.59%to 23.72%,and raising the sharpe ratio from-2.09 to-1.39.This method is equally effective for the combined reversal strategy(1,12,1)with a formation period of 1 week,a holding period of 12 weeks,and an interval of 1 week,and for the combined reversal strategy(3,1,1)with a formation period of 3 weeks,a holding period of 1 week,and an interval of 1 week.Except for a few months,the overall performance of the strategy was stable,and the expected risk adjustment was basically achieved.