Momentum and Reversal Effects: Evidence from the Chinese Growth Enterprise Market

Qian Ziheng, Chi Zhang, Taha Ahmad Jaber

Abstract


Purpose: In 2009, China officially launched its Second Board, the growth enterprise market (GEM). Known as the ChiNext market, GEM is a trading platform with similar characteristics to those of NASDAQ. This study investigated whether momentum and reversal effects exist in the ChiNext market. Specifically, whether ChiNext market implementation of the registration initial public offering (IPO) system would affect stock returns as momentum and reversal effects was examined.

Design/methodology/approach: Jegadeesh and Titman’s approach was used to test for the presence of a momentum or reversal effect. Winner, loser, and zero-cost portfolios were created using monthly stock returns. The ChiNext implemented the registration IPO system in August 2020. Ninety-two trading months and 49 strategies (January 2013 to August 2020) and 34 trading months and 16 strategies (August 2020 to June 2023) were examined.

Findings: Momentum profitability was recorded for 14 of the 49 momentum or reversal trading strategies from January 2013 to August 2020. The 16 trading strategies from August 2020 to June 2023 yielded no momentum profitability. The registration IPO system implementation was followed by a long-term reversal effect on the ChiNext market. Furthermore, the winner portfolio returns were predominantly negative in most strategies, whereas the loser portfolios typically yielded positive returns. The reversal effect persisted and even intensified upon implementation of the registration IPO system. The new policies for listed companies in the ChiNext market should be adjusted when implementing the registration IPO system, or that other factors affecting the ChiNext market exerted a long-term reversal effect.

Originality/value: This study contributed to the literature on momentum or reversal effects in the ChiNext market to bridge the research gap regarding the Chinese stock market Main Board. Despite registration IPO system implementation by the ChiNext market, the monthly trade stock returns demonstrated a clear, consistent, and long-term reversal effect for ChiNext market-listed equities. The findings provided a new understanding of the ChiNext market and the registration IPO system.

Keywords: China Growth Enterprise Market; ChiNext Market; Momentum Effect; Reversal Effect; Registration IPO System


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