A Comparative Study Of Momentum Effects In China’s Shanghai And Shenzhen A-Share Markets

The efficient market hypothesis has occupied an important place in modern financial market theory since its introduction,but along with the discovery of market anomalies by many scholars,studies have questioned the hypothesis.The Efficient Market Hypothesis highlights that the "rational man hypothesis" of the Efficient Market Hypothesis does not correspond to real-world conditions.There are a series of market anomalies in the stock market,including the momentum effect,reversal effect,and holiday effect.Among them,the momentum effect has been widely concerned by domestic and foreign scholars due to its simple definition,widespread existence and practicality.In the industry,the momentum effect is also widely used by algorithmic traders due to its excellent and consistent performance and operability,and the application of this effect to the design of investment strategies can yield excess returns.The momentum effect suggests that stocks with large gains in the past period will continue to perform better in the future period,while stocks that have performed poorly in the same past period will continue to be weak in the future period.At present,the momentum effect has been proven to exist widely in many emerging markets and developed markets.However,in China’s A-share market,due to the frequency of sample data and sample selection interval,domestic scholars have not yet formed a more consistent conclusion on the existence of the momentum effect in China’s A-share market and the effectiveness of the momentum strategy.The traditional momentum strategy based on total return ranking has significant time-varying exposure to Fama’s three factors,and the performance varies significantly in different market states.Therefore,the study begins to complement the traditional momentum effect by proposing a residual momentum effect,which is obtained by regressing stock returns on the Fama three-factor model to construct a residual momentum strategy to reduce portfolio exposures.Numerous empirical studies have shown that residual momentum is widely available in developed and emerging markets and has better return performance and Sharpe ratio than the momentum effect.Against this background,this paper investigates the Shanghai and Shenzhen A-share markets using weekly data from December 2011 to December 2021,respectively,with the following main elements.First,this paper constructs traditional momentum portfolios with different formation and holding periods(JT momentum portfolios)based on total return ranking using overlapping sampling method,and tests and compares the existence and significance of JT momentum effects.The results show that there is a reversal effect in both Shanghai and Shenzhen A-share markets in China in the short term,and a significant momentum effect can be observed in the medium term for Shenzhen A-shares,while the momentum effect is not significant for Shanghai A-shares.The JT momentum effect is examined in terms of interval,book-to-market ratio and market state,and it is found that all three factors have a significant effect on the momentum effect.Specifically,the JT momentum effect is stronger for stocks with low book-to-market ratios than for stocks with high book-to-market ratios,and the JT momentum portfolio returns are higher in a bullish market than in a bearish one.For the residual momentum effect,this paper analyzes the influencing factors of residual momentum portfolio returns from the perspective of residual volatility and finds that unstandardized residual returns can also be used as residual momentum to construct portfolios and achieve good return performance.Finally,this paper compares the return performance of a JT momentum portfolio with a 1-week interval and a 1-week formation and holding period with that of a residual momentum portfolio,and finds that the residual momentum portfolio performs better than the JT momentum portfolio and has a higher Sharpe ratio than the JT momentum portfolio.The significance of this paper is that by comparing the performance of the JT momentum effect in Shanghai and Shenzhen markets and the return performance of the two types of momentum portfolios,we can provide new portfolio construction methods for investors in China’s A-share market and improve their capital allocation efficiency.In addition,the findings of this paper help to better grasp the operation rules of China’s stock market and provide targeted suggestions to the regulators and policy makers of Shanghai and Shenzhen markets to solve key problems.Therefore,studying the JT momentum effect and residual momentum effect in China’s A-share market can help Chinese investors understand the market and further promote the healthy development of China’s stock market.