Risk Management Of Reverse Crashes

The efficient market hypothesis is one of the most basic theories in the field of traditional finance.It believes that the asset price contains all valuable information related to it,and investors cannot predict the future price changes of assets based on the past price information of assets,that is,investors cannot obtain excess profits.However,since the 1980s,a large number of data and empirical studies in the international financial market have shown that there are many "market anomalies" in the market that deviate from the efficient market hypothesis,and momentum effect and reversal effect are one of the most typical market anomalies.As a relatively common and stable market anomaly,momentum effect and reversal effect have found relevant evidence in various types of financial markets in many countries,and can obtain excess returns in global financial markets through"momentum strategy" or "reversal strategy".However,Daniel and Moskowitz(2016),when studying the data of the US stock market from 1927 to 2013,found that the return of momentum strategy would have a significant retreat in a certain period of time,which is called momentum crashes.Daniel and Moskowitz(2016)found that this phenomenon also exists in the financial markets and asset classes of other countries.Contrary to the momentum crashes,the reverse crashes is the phenomenon of the sharp withdrawal of assets when using the reversal strategy to study the financial market.At present,some scholars in China’s financial market,such as Liang Qiuxia,Chu Tao,Shu Chunhui(2016),Wu Xu(2017),Yuan Meng(2018),and Zhang Zhengbo(2021),have found that there is a significant reversal effect in the GEM market in the short term.However,they have not further explored the significant asset retreat phenomenon caused by this reversal effect in the GEM market during a specific time period.Zhang Chong(2015)conducted research on the phenomenon of momentum collapse in the GEM market,but did not conduct empirical analysis or explain how to manage this risk.The GEM market has broadened the financing channels for small and mediumsized enterprises and is a very important part of China’s financial market.Further research on the GEM market is necessary.This article studies 32 combinations with formation and holding periods of 1,2,3,and 4 weeks,with intervals of 0 or 1 week,based on the approach of Jegadeesh and Titman(1993).It is found that there is a significant weekly reversal effect in the GEM market.By further drawing the cumulative return curve of the reversal strategy,it can be found that the GEM market has experienced a reversal collapse phenomenon,Then this article analyzes the risks and timing of momentum strategy or reversal strategy in the GEM market and the return retreat of Shanghai and Shenzhen A-shares,and then constructs a model based on volatility to manage the risk of reversal collapse.The findings are as follows:1.In the case of no interval,the t-value statistics of all cases with the formation period of 1,2,3 and 4 weeks and the holding period of 1,2,3 and 4 weeks are significant at the 1%significance level,and the t-value is greater than zero,which indicates that there is a very significant reversal effect in the GEM market in the short term.2.In order to eliminate the price lag effect,in the case of interval,the formation period is 1,2,3,and 4 weeks,and the holding period is 1,2,3,and 4 weeks,except(1,1,2)(1,1,4)(2,1,1,1)is significant at the 5%significance level,the other combinations are significant at the 1%significance level,and the t value is greater than zero,This shows that there is still a very significant reversal effect in the GEM market in the short term when there is an interval.3.This paper takes the(1,0,1)zero portfolio as the research object and draws the cumulative return curve of the strategy.It is found that from the first week of February 2015 to the second week of July 2015,the(1,0,1)portfolio has a significant withdrawal of the strategic return,and the phenomenon of reverse crashes has occurred.The total assets have decreased from 8.55 yuan to 4.7 yuan,with a withdrawal of as much as 45%.During this period,the cumulative income of the GEM market is growing rapidly,which indicates that the reversal strategy is not applicable to the GEM market at the stage of rapid growth.4.This paper finds that the timing of the crashes of the reverse strategy in the GEM market is not consistent with the timing of the crashes of the momentum strategy in the Shanghai and Shenzhen A-shares,which is in line with expectations.Finally,based on the model of reverse position and the prediction effect of factors,this paper designs a dynamic reversal strategy,selects the volatility of the return of the portfolio with risk factor LMW zero in the past four weeks,MomVol4.When the value of MomVol4 is greater than 3.3 times of the average value of the factor of MomVol4 in the past 13 weeks,use the dynamic strategy,otherwise continue to use the reversal strategy.Through the above dynamic model,the maximum withdrawal of the reversal strategy(1,0,1)decreased from 45.76%to 21.74%,the Sharp ratio increased from 0.182 to 0.204,and the maximum asset increased from 35.965 yuan to 50.120 yuan,effectively improved the reverse crashes phenomenon of the strategy from the first week of February 2015 to the second week of July 2015.