Application of Momentum Strategy in the Chinese Market

In recent years, momentum trading has been a very mainstream trading strategy. The Chinese market is an emerging market and there are a large number of retail investors. Thus it is characterized by irrational behavior and non-efficient markets. These characteristics are favorable for applying the momentum strategy, which has not been widely used in the Chinese market. In this paper, three tests to examine the non-effectiveness and trend correlation of the market are conducted and a momentum strategy - determining the timing of trades by judging the market trend based on those tests is proposed. The empirical experiments shows that when time interval is small, the strategy achieves good performance on two representative indices of Chinese market, the CSI 300 Index and the CSI 500 Index. It also indicates that in certain cases there are indeed a certain of market inefficiency in China and that momentum is a proper trading strategy to get profit.