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There is a tendency for stocks that have performed well in the past to continue performing well in the short term and vice versa. This pattern is called price momentum, which reflects the idea that past performance can influence future stock movements. In the US stock markets, this price momentum presents in the medium-term range of one to 12 months before it reverses in the long-term range of two to five years.
However, such medium momentum and long-term price reversal are absent in Chinese bourses, despite being the world’s second-largest with more than 4,700 listed stocks. Instead, their stock prices exhibit strong momentum at the daily level, indicating daily price momentum.
“In daily price momentum, stocks in Chinese markets exhibiting strong performance today are likely to maintain this outperformance tomorrow,” says Jiang Wenxi, Associate Professor in the Department of Finance at the Chinese University of Hong Kong (CUHK) Business School. “This momentum persists for one to two days before exhibiting a reversal within a week.”
In a research paper titled Daily momentum and new investors in an emerging stock market, Professor Jiang and an Associate Professor in the same department, Gao Zhenyu, along with Xiong Wei A of Shenzhen Stock Exchange and Xiong Wei of Princeton University, tried to cast light on this phenomenon.
“The Chinese stock market is predominantly occupied by retail investors and is characterised by frequent influxes of new investors, a common trait among emerging markets,” says Professor Jiang. “These new investors, possessing limited investment experience, are prone to cognitive biases and susceptible to the emotional impacts of market fluctuations.”
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