Can Risk Factor Model Explain Momentum Effect?

Efficient Market Hypothesis (EMH) is by far the most important and vastly influential theory in the financial market. Since Fama (1970) put forward EMH, Anomalies in the world securities market make a strong impact on it. The assumption of efficient market theory is investors are rational. Even through, some investors are irrational sometimes, rational investors would take arbitrage to rectify the irrational effect on stock price, so that passive investment strategies would be the best strategy among all strategies.But with the deepening empirical study of the market among the world, the researchers found that some anomalies can’t be explained by the effective market theory. Such as Benz(1981) proposed a Small company Effect, Cross and Frank(1973)proposed Calendar Effect, De. Bondt and Thaler (1985) put forward the Reversal of the Effect and Tversky and Kahneman (1979) proposed the prospect and applied the theory to investment to formed the Disposition Effect, etc. so many anomalies that make researchers began to doubt the efficiency of the EMH.After Fama retort the various of Anomalies which went against the "efficient market Hypothesis ", he had to admit that "momentum effect" is still difficult to negative. The so-called momentum effect is refers to buy the past good stocks, sell the past bad stock, constructing the zero cost investment portfolio, which can get significant excess profits. Momentum effect indicates that stock price tendency will last for a period of time. This is a clear violation of efficient market hypothesis. The study of "momentum effect" began with the Jegadeesh and Titman (1993), they take the data from CRSP to study the U.S stock market and found that by3to12months for the formation of a stock portfolio strategy of momentum profit can present a continuity, Since then, other researchers found not only in the U.S. stock market but also in Europe (Rouwenhorst,1999), Hong Kong, Singapore and Japan market (Hameed and Yuanto2002)exist the momentum effect. Jegadeesh and Titman(2001)choose another samples to study, the results are consistent with the previous research. So as to prove the momentum effect does exist, and not because of the particularity of sample caused.Since the researchers make agreement about the existence of the momentum effect,they began to focus on the interpretation the cause of the momentum effect. According to the current literature can be roughly separate the interpretation the cause of the momentum effect into two categories.Barberis,Shleifer,Vishny(BSV);Daniel,Hirshleifer,Subrahamanyam(DH S);Hong, Stein (HS) as a representatives, try td make use of behavioral finance to explain the momentum effect. They think the momentum effect is caused by investors’inherent deviation to response to the new information. The other part of researchers did not agree with the explanation of behavioral finance to explain the momentum effect. They tried to take the traditional risk compensation factor to explain the momentum effect.For the existence of the momentum effect, the researchers in our country also has certain difference. Some part of the researchers found that in our stock market only reversal strategy profit significant, but the momentum strategy profit not significant. But another part of the researchers use different time periods sample to study the momentum and found that our country securities market in the short term exists momentum effect. The research results provide the basis of this paper, and also provide the direction for further research. Firstly, this paper hope to prove the existence of the momentum effect in our country. Secondly previous literatures rarely study the characteristics of the Small and Medium plate market which relative new to the main board, our paper would be a good supplement. Finally the previous literatures rarely study the cause of the momentum effect, our paper try to introduce firm characteristics, market characteristics and business cycle characteristics these traditional risk factors to explain the cause of the momentum effect.Through empirical research we found that:small and medium-sized board market momentum effect is really existed. And the explanatory power of firm characteristics, market characteristics and business cycle characteristics is significantly improved compared to the CAPM and the Fama-French three factor model.