High Momentum and Traditional Momentum
Strategies: Evidence from China

Traditional Momentum (Jegadeesh and Titman,
1993)



A self-financing strategy that buys the top 20% and
sells the bottom 20% of stocks ranked by returns
during the past X months, and holds the positions for Y
months
X, Y : 3, 6, 9, 12
Significant Profits
Traditional momentum strategy, (X,Y)
(JT, 1993)
t
Formation Period: X months
At the beginning of each month
t, stocks are ranked in ascending
order according to past return of
past X months. Stocks ranked in
the top 20% constitute the
winner portfolio, stocks in
bottom 20% constitute the loser
portfolio,
Holding Period: Y months
These portfolios are
equally weighted.
The strategy is to hold,
for Y months, a selffinancing portfolio
that is long the
winner and short the
loser portfolios
Literature

52-week (12-month) high momentum (George and
Hwang, 2004)

A self-financing strategy that buys the top 20% and sells the
bottom 20% of stocks ranked by the nearness of stock price to its
12-month highest price, and holds the positions for 6 months

Nearness to the 52-week high is a better predictor of future
returns than are past returns

Nearness to the 52-week high has predictive power whether or
not stocks have experienced extreme past returns

Considering investor behavioral bias
X-month high momentum strategy, (X,Y)
(GH, 2004)
t
Formation Period: X months
At the beginning of each month t,
stocks are ranked in ascending
order according to nearness ratio
based on past X months highest
price. Stocks ranked in the top
20% constitute the winner portfolio,
stocks in bottom 20% constitute the
loser portfolio,
Holding Period: Y months
These portfolios are
equally weighted.
The strategy is to hold,
for Y months, a selffinancing portfolio
that is long the
winner and short the
loser portfolios
Stock
Price
Highest Price: Pt*
Nearness
Ratio:
Pt/Pt*
Formation Period
t
Time
Motivation

Out-of-sample Test and new evidence from China

Why studying China Stock Market?




Large proportion of individual investors with short
investment horizon
Underdeveloped institutional investors prior to 2003
Poor transparency of information disclosure
Frequent and Inconsistent regulatory changes
Motivation

George and Hwang (2004)




52-week high is most readily available to investors
Virtually every newspaper that publishes stock prices
also identifies the stocks that hit 52-week highs and
lows
Why are 52-week?
How about 26-week high, or 12-week high?
Motivation

The evidences of traditional momentum in
China’s stock market are mixed

Kang, Liu and Ni (2002)


Wang (2004)


Momentum strategy with formation and holding periods of 16,
20, or 26 weeks are significantly profitable
Momentum strategy with formation and holding periods less
than 26 weeks are insignificantly profitable
Comparison between traditional momentum and
52-week high momentum
Main Issues

The profitability of the 52-Week High Momentum
Strategy in China market

Robustness for formation and holding period

Comparison between traditional momentum and
52-week high momentum
Major Findings

The 52-week high momentum is more profitable
in China market than US market.

The profitability of x-month high momentum is
robust for 6, 9, 12 months formation and holding
period

Separation between traditional momentum and
52-week high momentum
Data and Methodology

Center for China Economic Research (CCER)
Database

Sample Period: January1994 to June 2003

Methodology: JT (1993) and GH (2004).
Empirical Results

The average monthly return for 52-week high
momentum strategy in China’s stock market is
0.84% (t=2.62), which is more significant than
that in the U.S. market with an average return of
0.45% (t=2.00).
Empirical Results
7
6
Loser
Winner
Market
5
4
3
2
1
0
199401
199602
199803
200004
200205
Empirical Results


Traditional
Momentum
strategy
Insignificant
average return
Average Monthly
Return (%)
t statistics
(3,3)
-0.36
-0.60
(6,3)
-0.09
-0.18
(6,6)
0.15
0.37
(9,3)
0.12
0.24
(9,6)
0.20
0.39
(9,9)
-0.02
-0.04
(12,3)
0.08
0.14
(12,6)
-0.09
-0.15
(12,9)
-0.33
-0.59
(12,12)
-0.49
-0.89
Empirical Results


X-month high
Momentum strategy
Significant average
return
52-week high
momentum strategy
Average Monthly
Return (%)
t statistics
(3,3)
-0.17
-0.45
(6,3)
0.44
1.08
(6,6)
0.67
2.66
(9,3)
0.70
1.53
(9,6)
0.76
2.75
(9,9)
0.59
2.38
(12,3)
0.80
2.01
(12,6)
0.84
2.62
(12,9)
0.4
1.32
(12,12)
0.02
0.04
Empirical Results

No seasonal pattern

The abnormal return can not be explained by
market model, the Fama and French 3-factor
model, or the characteristic model based on size
and book-to-market ratio.
Empirical Results

52-week high distance: the number of days from
the highest price to the end of month t

The closer the highest point, the weaker the
profits of the strategy
Conclusion

The average monthly return for 52-week high momentum
strategy in China’s stock market is 0.84% , which is more
significant than that in the U.S. market

China has 52-week high momentum but no traditional
momentum.

There are some new evidences related to 52-week high
momentum strategy