Momentum strategies and stock returns: Chinese evidence

Naughton, Tony; Truong, Cameron; Veeraraghavan, Madhu

doi:10.1016/j.pacfin.2007.10.001

Cited by 83 publications

(46 citation statements)

References 30 publications

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“…The results reported in Table 2.2 are consistent with studies documenting a momentum effect in China (see for example Kang et al, 2002;Naughton et al, 2008;Wang, 2008). There are, however, studies that report insignificant momentum returns in China.…”

Section: Momentum Returns For Different Marketssupporting

confidence: 85%

Three Essays on Momentum Returns

Cheema

2013

SSRN Journal

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all datasets even after adjusting for the Fama-French risk factors. However, the momentum trading strategy generates negative returns for all markets during the Global financial crisis; it appears that the momentum trading strategy fails during a financial or stock market crisis and especially in the months when the market conditions improve. I find no significant relationship between momentum returns and market states, which contradicts the results of an earlier study conducted in the U.S. market. Instead of market state it appears that it is economic activity that explains momentum returns.In the second essay, entitled 'Momentum Returns and Information Uncertainty', I study the impact of information uncertainty on the profitability of the momentum trading strategy. Prior literature attributes returns of the momentum trading strategy to investor behavioural biases, such as under reaction to new information, and provides evidence that firms with higher information uncertainty earn lower future returns and higher momentum returns. This study investigates the relationship between information uncertainty, future returns and the momentum trading strategy in China over 1994 to 2010. Using age, volatility, volume and firm size as information uncertainty proxies, I find that firms with higher information uncertainty earn higher average returns over the succeeding 6-month period when information uncertainty is defined in terms of firm size and volume, consistent with the traditional risk ii based theories. However, firms with high information uncertainty earn lower returns if information uncertainty is defined in terms of firm age; however, firm age might not be an important factor in explaining future returns as the age difference among young and old firms is quite small and it might be the other firm-specific characteristics that drive lower future returns for the younger firms instead of their age. Therefore, my study rejects the findings of Jiang, Lee and Zhang (2005) that stocks with higher information uncertainty earn lower returns over the succeeding 6-month period. Using portfolio-level analysis and firm-level Fama and Macbeth regressions, I find that no robust significant relationship exists between information uncertainty and momentum returns. My findings suggest that it might be the activities of retail investors that drive momentum returns since China's market is dominated by retail investors, whereas the momentum effect is weak among the U.S. stocks with higher institutional holdings.

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Section: Momentum Returns For Different Marketssupporting

confidence: 85%

Three Essays on Momentum Returns

Cheema

2013

SSRN Journal

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“…Chen et al (2007) show that Chinese investors sell stocks that have increased in value and hold on to stocks that have been decreasing in value. Naughton et al (2008) also show that although price momentum is strong in the Shanghai market, past trading volume has little predictability in China. Specifically, our study is related to that of Garfinkel and Sokobin (2006) in that we define earnings surprise as abnormal returns and to measure opinion divergence which is unexplained volume, the difference between earnings announcement turnover and the turnover from a non-announcement period.…”

Section: Introductionmentioning

confidence: 93%

Is Post Earnings Announcement Drift A Priced Risk Factor in Emerging Markets? Chinese evidence

Dempsey¹,

2017

ABR

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This study examines the profitability of trading on earnings surprises in the postearnings announcement period for equities listed in the Shanghai and Shenzhen stock exchanges spanning the period 2000 to 2008 when Chinese markets were developing. The paper also examines whether the drift is a priced risk factor. We show that a postearnings announcement drift (PEAD) anomaly exists in China. We document that a hedge strategy of going long on stocks in the highest earnings surprise decile and going short on firms in the lowest earnings surprise decile generates 7.92% excess return in the 60 days following the earnings announcement. We also show that the PEAD is a priced risk factor. Our paper is the first to document that PEAD is systematically priced as a risk factor in stock returns. JEL classification: G11 G14 G15 M41Keywords: Post-earnings announcement drift, Earnings surprise, Divergence of opinion, Asset pricing INTRODUCTIONIn this paper we examine the profitability of trading on earnings surprises in the post-earnings announcement period for equities listed in the Shanghai and Shenzhen stock exchanges spanning the period 2000 to 2008. We also examine whether the PEAD is systematically priced as a risk factor in stock returns. We examine the significance of PEAD in the context of the onefactor and three-factor asset pricing models, as well as the enhanced one-factor and threefactor asset pricing models. We show that stock prices from the Chinese stock market have pronounced delayed reactions to earnings information. Specifically, a hedge strategy of going long the top decile of earnings surprise stocks and short the bottom decile of earnings surprise stocks can generate 7.92% excess return in the 60 days subsequent to earnings announcements. There is evidence that the magnitude of PEAD decreases in the level of market risk and increases in the level of trading volume as a proxy for transaction costs and liquidity. As far as the asset pricing tests are concerned we show that PEAD is a priced risk factor.

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“…We calculate the momentum profit at the end of the holding period, and we weigh each stock equally in our calculation. We refer to Naughton et al (2008) and adopt the raw return in the above calculation.…”

Section: Data Descriptionmentioning

confidence: 99%

Artificial Momentum, Native Contrarian, and Transparency in China

Lin

Hung

Huang³

2017

Comput Econ

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The Chinese stock market has a large ratio of retail investors, which is significantly different from the stock markets in the US and Europe. We have known that momentum profits exist in the latter by applying Jegadeesh and Titman's (J Financ 48:65-91, 1993) model with 6-month formation and holding periods. However, there are only a few studies on momentum profits in China. Therefore, this study examines whether the Shanghai and Shenzhen stock markets produce momentum profits. We find that these two markets have significant contrarian but not momentum profits. We also create an "artificial momentum" portfolio and follow Bhattacharya et al. (Account Rev 78:641-678, 2003) to compute the transparency indices. Our outcomes show that the corporate transparencies of the winners (losers) in the artificial momentum portfolios are close to those in the commonly-defined momentum portfolios. The averages of the decile transparencies are between 4.5 and 6.5, not only for the top 10% of winners but also for the bottom 10% of losers. According to these results, we suggest that financial transparency is irrelevant to the inertia and reversal of stock prices in the Shanghai and Shenzhen stock markets.

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Momentum strategies and stock returns: Chinese evidence

Cited by 83 publications

References 30 publications

Three Essays on Momentum Returns

Three Essays on Momentum Returns

Is Post Earnings Announcement Drift A Priced Risk Factor in Emerging Markets? Chinese evidence

Artificial Momentum, Native Contrarian, and Transparency in China

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