A comprehensive investigation into style momentum strategies in China
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A comprehensive investigation into style momentum strategies in China Chen Su1 Accepted: 31 October 2020 © The Author(s) 2020
Abstract This study conducts a comprehensive investigation into style momentum strategies— the combination of price momentum strategies based on previous medium-term returns and style investing in terms of firm characteristics—in the China stock market over the period 1994 to 2017. Although we do not find style momentum profits over the first sub-period 1994 to 2006, strong evidence shows that style momentum strategies are profitable over the second sub-period 2007 to 2017, even after controlling for trading costs and various market and firm-specific risks. Importantly, the observed style momentum in the second sub-period is distinguished from price momentum and industry momentum but could be attributed to the improved institutional settings in recent years. Specifically, the fast growth of institutional investors since 2006, along with the introduction of margin trading and short sales in 2010, provides style switchers with more efficient investment vehicles to trade an entire style in the China stock market. Finally, we find that style profits exhibit momentum in a cyclical nature; in particular, style momentum profits are negatively related to market states, implying that it is likely for institutional investors to make profits by constructing style momentum strategies when stock market experiences a major decline. Keywords Style momentum · Price momentum · Industry momentum · Market states · Institutional investors · China stock market JEL Classification G11 · G14 · G15
1 Introduction In the stock markets, when investors make portfolio allocation decisions, they generally categorize assets into broad classes across various firm characteristics, such as size measured by market capitalization of equity, value/growth measured * Chen Su [email protected] 1
Newcastle University Business School, 5 Barrack Road, Newcastle upon Tyne NE1 4SE, UK
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by book-to-market ratio (B/M), and industry, and then decide how to allocate their funds across these asset classes. These asset classes are sometimes called styles, and the process that investors allocate their funds among styles is known as style investing. Barberis and Shleifer (2003) argue that style investing helps investors to optimally construct and simplify diversified portfolios, to effectively identify and manage sources of risk, as well as to easily measure and evaluate portfolio performance relative to specified style benchmarks, such as a growth or value index. Therefore, style investing is “particularly attractive to institutional investors, such as pension plan sponsors, foundations, and endowments, who as fiduciaries must follow systematic rules of portfolio allocation” (Barberis and Shleifer 2003; p. 162). Not surprisingly, with the interest in style investing grown over the years, most fund managers now tend to identify themselves as following a particular investment style, such as growth, value,
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