| Researches on anomaly in the field of empirical asset pricing is probably the most closely related part between academia and money industry.Both LSV and AQR,famous investment funds,have published a large number of papers in top financial journals and make huge moneys from the capital market through the study of anomaly in American capital market.Market anomalies violate the "efficient market hypothesis" proposed by Fama in 1970,which holds that market prices have reflected all historical information.If there are factors in the historical information of the market that can predict future returns,anomalies will occur.The anomalies of capital market should be very rare,but they are numerous in reality.Even removing the famous size and value factors from Fama-French model(which considered to be risk characteristics rather than anomalies),nearly 100 anomalies have been published in top journals(Mc Lean and Pontiff,2016).Momentum and reversal,as two completely opposite phenomena in the formation and holding periods of the same cumulation returns in different time lengths,are the jewelries of crown;.The momentum effect was first proposed by Jegadeesh and Titman(1993).They found that stocks that had performed better(worse)in the past three to 12 months tend to perform better(worse)in the next three to 12 months,and their formation and holding periods were "medium-term".Reversal effect was initially proposed by De Bondt and Thaler(1985).They found that stocks that had performed better(worse)in the past 36 months would perform worse(better)in the next 12-36 months,and their formation and holding periods were "long-term".Then Jegadeesh(1990)found that stocks that had performed better(worse)in the past 1 month and 12 months would perform worse(better)in the next 1 month,and their formation and holding periods were "short-term".So far,the framework of research on reversal and momentum has been established.Researchers have reached an agreement on the time length of the two effects,that stock returns have momentum effect in the medium term,and reversal effect in the long and short term.Although a large number of anomaly factors have been found in foreign markets,domestic research on A-share market anomalies has not made much progress.Besides reversal effect and accrual anomaly,researchers have not found much anomalies in Ashare market.The main reason is different investors’ structure and market system.Firstly,the proportion of retail investors is relatively high in A shares markets.The irrational degree of retail investors is high,and they like to trade excessively and chase up the rise and fall,which results in a large number of turnover rates and price overreaction of A shares.Previous studies have shown that noise trading is too much and excessive trading is serious in A-share market.Reversal effect is more obvious than momentum effect(Lu Zhen,2007;Wang Yonghong and Zhao Xuejun,2001).Secondly,in terms of the system design of A-share,there are very serious shortselling constraints in A-share market.Miller(1977)argues that the more short-selling constraints the market faces,the more prices reflect expectations of optimists,that is,they are more likely to overestimate.As the short-selling constraints of individual stocks in A-share market are very serious,and the short-selling products based on index have just been introduced,there is a general overvaluation of stock prices in Ashare market,which will also lead to a very serious reversal.Therefore,from the perspective of investor structure and market system,A shares have natural reversal characteristics,which affects other anomalous factors,leading to research is not easy to get results.In addition,because individual stocks can hardly sell short,the practical significance of the research strategy is very limited.The difficulty of the research is great,and the significance of the research is small,so few researchers work deeply in this field.However,Chinese stock market will eventually get mature,no matter from the investor structure or market system will have major changes.On March 30,2010,the Shanghai Stock Exchange and Shenzhen Stock Exchange issued announcements respectively,indicating that they will formally open the margin trading system from March 31,2010,and that the short selling system for individual stocks is just introduced.On April 16,2010,HS300 stock index futures contracts were formally listed and traded,and the short selling system based on index was also issued one after another.On June 13,2019,STAR market officially opened.All shares listed on STAR market can be short.Now the existing research on market anomalies has a certain practical significance.Even though it is generally believed that the shortselling constraints of individual stocks are strong,as long as the long side of strategy can outperform the market index,they can obtain excess return through short-selling stock index futures without taking too much risk.In addition,any research on market anomalies actually perfects the mechanism of price discovery in the market.Arbitrators will make stock prices return to their true value by seeking overvalued and undervalued stocks for arbitrage.Especially in the period of rapid development of Chinese capital market,the study of capital market anomalies will provide better suggestions for future institutional design.This paper studies the role of extreme returns in explaining the strong reversal phenomenon in China and the relationship between A-share market reversal and momentum strategy.This paper studies these problems in three chapters from the aspects of momentum,reversal and the role of lottery-like preference.Firstly,we find that after deleting a certain degree of extreme returns,the residual cumulative returns as a momentum strategy factor can generate significant and robust momentum returns.The strategy return can not be explained by market beta,size,book to market ratio,liquidity,idiosyncratic volatility and turnover factors.Secondly,the reversal strategy constructed by cumulative extreme returns can not only generate robust returns and alphas,but also explain the reversal strategy constructed by cumulative returns.Finally,through further study of these extreme returns,it is found that due to the strong short-selling constraints,there is serious speculation in the domestic market,these rising stocks will attract a large number of investors with lottery-like preference to buy and further push up the stock price,leading to overvalued stock prices can not return to the normal level in a short time,and the continuously overvalued stock prices will also bring a strong reversal effect.Therefore,extreme returns are not driven by fundamental information in most cases.These extreme returns are proxy for lottery-like stocks which tend to be overvalued for a long time or to a large scale,will lead to a very strong reversal and also affect the momentum effect.This study provides evidence that speculations in the capital market are target on investors with lottery-like preference,which can lead to sustained and systematic overvaluation of stock prices.Because of the strong short-selling constraints,short sellers can not profit from short-selling when the stock price is overvalued,thus affecting the stock price.When the final stock price returns to the real value,the overreaction has become more serious,which leads to the subsequent strong reversal effect and aggravates the volatility of the stock market.After the reform of nontradable shares in 2005,the two bull markets in China ended in a crash.The index is like a roller coaster,which is consistent with the results of this paper.The innovation of this paper is that the monthly momentum effect is first found in the domestic market by linking the extreme returns with momentum and reversal effect,and two reversal strategies are proposed to explain the current reversal strategies constructed by cumulative returns.At the same time,from the perspective of lotterylike preference,this paper also explains that speculation in the capital market would attract investors with lottery-like preference.Under the premise of our unique system,speculators can profit from speculation.The stock price raised by speculation will inevitably lead to the subsequent reversal without stock fundamental to support it.The results of this paper explain the current situation of anomalies in domestic capital market to a certain extent,that is,reversal effect is more prominent,while other phenomena are not obvious.Through the research on momentum and reversal effect of A-share market in China,this paper tries to explain the current situation and reasons of the research on anomalies in Chinese capital market.It also advises investors to stay away from stocks that have surged in the short term,and regulators need to focus on those stocks.Finally,this paper also explains the characteristics of high volatility and turnover rate of A-share market,and the conclusion has constructive significance for improving the market system. |
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