A new momentum measurement in the Chinese stock market

Abstract

Literature shows that the traditional momentum effect is absent in China, and our evidence also confirms this. However, considering the information of short-term investors' consistent beliefs in price movements, we can capture a significant momentum effect. The short-term information horizon for reflecting the investor belief is relative to the longer information horizon of asset past performance in capturing basic momentum. By constructing an indicator of CB to reflect investors' short-term consistent belief in price movements, we develop a new momentum indicator, CBMOM, as the product of short-term CB and long-run past returns. Based on the data from January 2000 to December 2020 in China, our results show that CBMOM has an advantage of capturing the momentum effect over the past-return measure. In particular, the momentum strategy based on CBMOM with the one-month CB and the one-year past return has the strongest profit. Furthermore, we examine the nonlinear impact of the synergy between CB and the one-year past return on stock returns. Specifically, the one-year past return has a greater positive impact as the cross-sectional CB level increases, but the significance is strong only for the highest-level CB.