A comprehensive investigation into style momentum strategies in China

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.