Improving market timing of time series momentum in the Chinese stock market

ABSTRACT

This paper is the first study to present firm-level evidence that the time-series momentum (TSMOM) strategies with look-back-period k of 10 to 200 days outperform the buy-and-hold strategy (BH) on individual stocks in the Chinese stock market. We document that the optimal k* generating the best performance is different across assets and varies over time. We hence propose a model to predict the asset-specific and time-dependent k*, and examine the performance of the TSMOM strategies with the predicted k*. Our analysis shows that using the time-varying predicted k* substantially improves the predictability of the TSMOM strategies. Our new model and findings shed the light on trading strategy for both academia and applied investment practitioners.

KEYWORDS:

• Technical analysis
• time-series momentum
• market timing
• Chinese stock market

JEL CLASSIFICATION:

• C32
• C53
• G11
• G12

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

¹ Such as Brock, Lakonishok, and LeBaron 1992; Blume, Easley, and O’Hara 1994; Zakamulin 2015; Lo, Mamaysky, and Wang 2000; Zhu and Zhou 2009; Neely et al. 2014; Kilgallen 2012; Huang and Zhou 2013; Glabadanidis 2014, 2015; Han, Yang, and Zhu 2016, etc.

² Such specification is closer to the traditional moving average (MA) trading strategy. Prior literature shows that TSMOM and MA are closely related but different. More details regarding the analysis of these two strategies can be found in Marshall et al. (2017), He and Li (2015) and Zhou and Zhu (2013).

³ The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghai and Shenzhen stock exchanges.

⁴ Even though we calculate the Jensen’s alpha for the TSMOM strategies with various k values as an additional robustness check, and the results are available upon request.

⁵ As a further robustness check, we calculate the Jensen’s Alpha (the results are available upon request) for each of our sample stocks from each TSMOM strategy. The results are again consistent with those in Table 3.

⁶ Descriptive statistics are available upon request.