An Strategy Study Of Momentum And Reversal Effect In China A-share Stock Market Based On Multi-factor Model

Since 80 s,traditional financial theory is being challenged such as random walk theory and effective market hypothesis.At the same time,there comes out more and more anomalies which can't be explained by traditional financial model in the stock market,such as small firm effect,earnings effect,B/M effect,momentum effect,reversal effect,and so on.And the higher excess return of the momentum and reversal effect attracts a large number of financial professionals to participate in its research.Momentum effect means that the stock return rate will remain its original trend in a period of time,and it will go into reverse after another period of time,which means reversal effect.The traditional financial theory holds that the momentum and reversal effect is result from mistaken of data mining.And EMH holds that the effect is caused by risk premium.Behavioral finance explain the effect from the behavioral characteristics of investors,and try to design financial models for this effect,such as BSV model,DHS model and HS model,etc.China A-share stock market is a young securities market,who is still in the rapidly developing stage.In this paper,China A-share stock market is acted as the research object corresponding to the momentum and reversal effect.The purpose is to innovate a new study method on momentum and reversal effect through quantitative means,and to help domestic researchers to observe the momentum and reversal effect of A –share stock market from a new point of view.So they can understand the market environment,the pricing mechanism and other micro market factors better.This paper is based on the method of multi-factor quantitative stock selection.Firstly,we found that the momentum and reversal portfolios whose formation periods are within 1 year are all reflected in a reversal effect over the past ten years.Secondly,the formation period of 8 weeks is the best from the perspective of stability and profitability.Thirdly,we designed the investment strategy with the core factor of 8-weeks-reversal factor.Then we try to promote the profitability of this strategy with value and growth factors,and to control the strategy volatility by hedge means.At last,we have achieved the compound annual growth rate of 33%,and the higher information ratio of 1.46 by the three-factor model.