A Momentum Investment Strategy Based on Correlations : A Comparison between China and Us Stock Markets

This paper studies the portfolio constructed by a correlation-based momentum strategy in both Chinese and American stock markets. By applying eight different correlations to return and other indicators, it is found that Pearson correlation gives the highest value between return and volatility, in which we define volatility as the ratio of the difference between the maximum and minimum price with two successive trading days. Then portfolios are constructed with three different weights including market capitalisation and correlation coefficient between return and volatility, including whether to consider the index. This strategy works in Chinese stock market both for fixed and random observation and holding periods, but not in America, in which SSCI and S\&P 500 Index are chosen as benchmarks respectively. Therefore, American stock market might be more efficient than the Chinese one and investors can gain an excessive return through a correlation-based momentum strategy in China