Momentum phenomenon in the Chinese Class A and B share markets

Wu, Yuan; Choudhry, Taufiq

Abstract

© 2015, © Emerald Group Publishing Limited. Purpose – The purpose of this paper is to investigate the momentum phenomenon in two market segments of the Chinese stock market – the Class A share market and Class B share market over time period spanning from January 1996 to December 2010. Design/methodology/approach – The authors largely follow Jegadeesh and Titman (1993) paper; the authors decompose the momentum returns following the procedure first proposed by Jegadeesh and Titman (1995). In addition, a liquidity factor (Pastor and Stambaugh, 2003) and a share ownership factor (Wang and Xu, 2004) are incorporated in the procedure to gauge the contribution of liquidity and the dynamics of share ownership towards the momentum returns, respectively in the two segments of the Chinese stock market. Findings – The authors find compelling evidence showing distinctively different momentum phenomena exist in the two market segments of the Chinese stock market. Specifically, the momentum phenomenon is more pronounced in the Chinese Class A share market compared to those found in the Chinese Class B share market. Through decomposing the momentum returns, the authors find evidence showing the dismal momentum returns observed in the Class B share market can be attributed to markedly weakened contributions of the liquidity factor and the share ownership factor. Research limitations/implications – Relatively short sample time horizon compared to the most of major financial markets such as USA and UK. The number of B shares has been rather limited. Practical implications – Subsequent to the opening of the Chinese Class B share market to domestic investors in 2001 and the opening of the Chinese Class A share market to qualified foreign institutional investors (QFII) in 2003, the empirical evidence found in this study provides a crucial reference point for domestic and foreign portfolio strategists in guiding them to form suitable portfolio strategies concerning investments in a nascent financial market such as the Chinese stock market, fraught with volatility and speculative trading behaviour. Social implications – It offers a comprehensive view of the momentum phenomenon in the Chinese Class A and B share markets over the sample period from January 1996 to December 2010. Second, the reasons behind the dichotomy of the momentum returns found in the two market segments were investigated through decomposing the momentum returns based on Jegdeesh and Titman’s (1995) method while incorporating three new explanatory factors – the liquidity factor, share ownership factor and the under reaction towards firm-specific news factor. Originality/value – A couple of extant papers have visited the topic before. yet this paper offers more comprehensive view on the existence of momentum premium in both Chinese Class A and B share markets and investigates the driving forces behind the subdued momentum returns observed in the B share market.

• Journal Article Type: Article
• Acceptance Date: Sep 17, 2014
• Publication Date: Nov 9, 2015
• Deposit Date: Mar 10, 2016
• Journal: Review of Behavioral Finance
• Print ISSN: 1940-5979
• Publisher: Emerald
• Peer Reviewed: Peer Reviewed
• Volume: 7
• Issue: 2
• Pages: 116-133
• DOI: https://doi.org/10.1108/RBF-06-2014-0032
• Keywords: decomposition of momentum returns, momentum phenomenon
• Public URL: https://uwe-repository.worktribe.com/output/845326
• Publisher URL: http://dx.doi.org/10.1108/RBF-06-2014-0032
• Contract Date: Mar 10, 2016