Abstract
Facing the current gaps with regard to the momentum effect in Chinese securities market, a momentum strategy was constructed to compare the securities market price under the effective market theory with under the non-effective market theory by the Hushen 300 index from 2006 to 2015 and a stock price residual measurement model. An important result was that the root cause of the momentum effect was systematic irrational behavior. On this basis, a new momentum strategy was constructed based on RSP (Residual of Stock Price), and the performance of that strategy was tested in different ranking and holding periods. The new momentum strategies were obtained positive average cumulative abnormal returns in the super short-term, short term and medium term. This finding confirmed the significant existence of the momentum effect in China’s stock market and the validity of the RSP momentum strategy. Therefore, this finding can be contributed to effectively addressed the current gaps and examine the applicability of classic asset pricing theory and behavioral finance theory in China's stock market. Finally, after considering the transaction costs, the momentum strategy is effective in both theory and practice.
Highlights
Since Fama et al (1970) formally put forward the efficient market hypothesis (EMH), the classical financial theory has undergone considerable development
A new momentum strategy was constructed based on RSP (Residual of Stock Price), and the performance of that strategy was tested in different ranking and holding periods
The RSP momentum strategy is more reasonable than the traditional price momentum strategy with regard to the inspection of the momentum effect
Summary
Since Fama et al (1970) formally put forward the efficient market hypothesis (EMH), the classical financial theory has undergone considerable development. Based on in-depth stock market research, many scholars have found that several types of market visions exist in the security market. These findings violate the efficient market hypothesis. One of these visions is the Momentum Effect (JT Price Momentum Effect), which was proposed by Jegadeesh and Titman (1993). Rouwenhorst (1998), and Liew (2000) confirmed that the momentum effect exists to some extent in the European stock market and yields a profit. Jegadeesh and Titman (2001) further pointed out that, as the market develops, the momentum effect still exists as the market vision Rouwenhorst (1998), and Liew (2000) confirmed that the momentum effect exists to some extent in the European stock market and yields a profit. Jegadeesh and Titman (2001) further pointed out that, as the market develops, the momentum effect still exists as the market vision
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