The Momentum Effect And Market Sentiment

Momentum and reversal effects have long been the focus of attention,and the total return(Close to Close)from the last close to the next close has always been the basis of research on asset pricing.However,some recent research results on the overnight return indicate that the price formation and information connotation of the overnight return(Close to Open)and the intraday return(Open to Close)are different.Since the T+1 trading system is implemented in China’s stock market,The Chinese stock market has a significantly negative overnight return.Combined with the traditional research and the latest findings,this paper introduces the day-night return decomposition into the momentum and reversal effect,and reexplores the momentum and reversal effect of stock returns.In this paper,the weekly total return(CTC)during the formation period of momentum strategy is decomposed into weekly overnight return(CTO)and weekly intraday return(OTC)to study its momentum returns respectively.And the impact of market investor sentiment on the momentum effect is further explored.Finally,the cross-sectional fluctuations of momentum effect are deeply analyzed from the two perspectives of individual investor irrationality and arbitrage restrictions.The results show that:(1)Overnight return CTO presents momentum effect,while intraday return OTC presents reversal effect;It means that the traditional momentum effect based on CTC mainly comes from the CTO momentum effect,and the traditional reversal effect based on CTC mainly comes from the OTC reversal effect.(2)Since the momentum effect of CTO damages the return of traditional reversal strategy,the return obtained by using OTC to construct the reversal strategy is greater than that by using CTC,which indicates that OTC may be a better short-term reversal factor compared with CTC.(3)Market sentiment has a positive impact on CTO momentum effect.The empirical results show that the CTO momentum effect only exists significantly during the period of high market sentiment,and market sentiment mainly affects the Loser portfolio.(4)On the one hand,the size of retail ownership has a positive impact on both CTO momentum effect and OTC reversal effect.The larger the size of retail ownership,the stronger the CTO momentum effect and OTC reversal effect.On the other hand,after taking into account the constraints of short selling and the price limits,the return of CTO momentum strategy is not significant,and the return of OTC reversal strategy also decreases,which indicates that the arbitrage restriction is an important reason for the existence of momentum and reversal effect.The study of this paper has important practical significance,our results suggest that momentum can be "visible and intangible" profit opportunities.Moreover,the study in this paper enriches the related researches in the field of reversal and momentum,which is helpful for the scholars to have a deeper understanding of short-term momentum and reversal in China.