Abstract
This study conducts a comprehensive investigation into style momentum strategies—the combination of price momentum strategies based on previous medium-term returns and style investing in terms of firm characteristics—in the China stock market over the period 1994 to 2017. Although we do not find style momentum profits over the first sub-period 1994 to 2006, strong evidence shows that style momentum strategies are profitable over the second sub-period 2007 to 2017, even after controlling for trading costs and various market and firm-specific risks. Importantly, the observed style momentum in the second sub-period is distinguished from price momentum and industry momentum but could be attributed to the improved institutional settings in recent years. Specifically, the fast growth of institutional investors since 2006, along with the introduction of margin trading and short sales in 2010, provides style switchers with more efficient investment vehicles to trade an entire style in the China stock market. Finally, we find that style profits exhibit momentum in a cyclical nature; in particular, style momentum profits are negatively related to market states, implying that it is likely for institutional investors to make profits by constructing style momentum strategies when stock market experiences a major decline.
Highlights
In the stock markets, when investors make portfolio allocation decisions, they generally categorize assets into broad classes across various firm characteristics, such as size measured by market capitalization of equity, value/growth measured1 3 Vol.:(0123456789)C
We find consistent evidence that industry-adjusted style momentum profits remain profitable in the second sub-period, confirming that style momentum is distinguished from industry momentum in the China stock market
We find style momentum profits are negatively related to market states, i.e., significantly positive style momentum profits following Down states and insignificant profits following Up states
Summary
In the stock markets, when investors make portfolio allocation decisions, they generally categorize assets into broad classes across various firm characteristics, such as size measured by market capitalization of equity, value/growth measured. The significant style momentum profits found in the second sub-period rather than in the first sub-period could be attributed to the improved institutional settings of the China stock market in recent years, such as the fast growth of institutional investors and the removal of various institutional barriers, which allow style switchers to allocate capitals and manage risks in a more efficient way. To the best of our knowledge, this is one of the very first systematic and comprehensive studies that extend price momentum strategies to portfolio-based momentum strategies in style context in the China stock market, showing some important evidence that complements the existing financial literature, but has significant impacts on institutional investors and policy makers.
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