The Evolvement of Momentum Effects in China : Evidence from Functional Data Analysis

In comparison to developed securities markets, it is intriguing to observe that the Chinese stock market's momentum or reversal effect is inconsistent. We address this controversy using a novel paradigm based on functional data analysis (FDA) with the goal of reconciling previous inconsistency. Compared with conventional approaches, the paradigm based on FDA can identify nonlinear cross-sectional patterns and dynamic time series evolvement. Our empirical findings provide compelling evidence that after the global financial crisis in 2008, mid-term momentum effects vanished and the market became dominated by reversal effects. Additionally, we find no evidence for permanent momentum effects in a variety of settings, but we do find significant evidence for short-(1-6 months) and long-term (3-year) reversal effects in China