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Empirical Study of Momentum Effect in Chinese A-share Stockmarket

Author: RenHao
Tutor: ChengJian; DuZuoZuo
School: Shanghai Jiaotong University
Course: Business Administration
Keywords: Behavioral Finance Momentum Reversal HS model
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Type: Master's thesis
Year: 2013
Downloads: 65
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Abstract


Based on basic theory of behavioral finance, through a an empiricalanalysis of the China A-share market momentum effect, this thesisidentifies how the unique structure of Chinese A-Share stock market hasaffected its momentum effect. It also compares the momentum effectwithin A-share stock market across different time period.The thesis first reviews the major classical financial theory since the1960s, the deepening development of fundamental theory, such as theefficient market hypothesis (EMH), the capital asset pricing model(CAPM), and then introduces the development of behavioral finance inthe past few years, including the evolvement of this field the maintheoretical achievements.Then, based on the classical model of behavioral finance, the specialstructure of the A-share market investors, market institutions anddevelopment in recent years, we make a simulating analysis onmomentum effect over the period from2001to2011. We collected stockmarket data over the period of11years, and then formed both an overlay and a non-overlay portfolio simulating to assess the significant level ofmomentum effect in the Chinese A-share stock market. We contrastedour result to earlier studies in in Europe and the United States to discoverthe difference between the Chinese market and the mature US market.We also reviewed the domestic scholars’ studies in the past few years tostudy the difference between our results. We found that the effect ofA-share momentum in the past decade has undergone significant changesfrom2001to2011.After we make a deep examination on the portfolio data for differenttime periods, we ultimately found that in a strong bull market, themomentum effect in the A-share stock market tend to diminish, and itgoes the opposite way in a bear. We try to explained this phenomenonbased on HS theoretical model and our common knowledge over thespecialties of Chinese A-share stock market. We made several guess overhow the dominance of individual investors in the A-share stock marketwill influence the momentum effect.The paper also checks the characteristics of small companies over themomentum effect.(The market values of those companies are less than20million). We find that no matter in the bull market and bear market,the smallest companies do not show any momentum effect, not evenwhen the whole market’s momentum effect is very significant. We tried several guesses but did not go further in this way as the time andresources are limited.Finally, this paper makes several prediction on what will be the futuretrend of momentum effect in Chinese A-share market based on the oursimulation results and analysis. And we believe, in the long term, thestrength of the momentum effect of the A-share market will graduallystabilize, but it should will be weaker than the U.S. and Europeanmarkets.

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