Researchers Siu Kay Choy, Dan Luo and Buqing Yang from King’s College London and the Shanghai University of Finance and Economics – School of Finance have found dollars on the sidewalk that shouldn’t be there.
These sidewalk dollars are the returns that an ‘efficient’ market shouldn’t permit i.e. patterns that reoccur and therefore should be quickly spotted and traded away.
Contrary to theory these patterns persist in many markets and a big one is momentum. Stocks shouldn’t go predictably in the same direction but they often do, except in the domestic China markets.
The absence of momentum in China has been put down to the high concentration of retail participants who operate less ‘rationally’ than institutional peers that dominate elsewhere.
So to find a momentum effect in China is rare but the authors of the paper highlighted today have found one, a ‘same day’ effect which is persistent and noticeable on Mondays and particularly Fridays.
China’s ‘T+1’ rule may have something to do with this. The rule says a stock can’t be bought and sold on the same day. It can however be sold and bought on the same day. On Friday this means an investor considering a purchase will be locked in for up to three days which they may not be keen to do. On Monday information from the weekend has to be digested making investors again wary of placing trades on that day.
Margin trading may also be a factor, especially on Fridays where investors may want to avoid the three day problem again, especially on leveraged positions where time equals risk-on-risk.
The paper concludes noting although these effects produce tangible theoretical results in practice the cost of trading may obliterate the advantage. However, they note in markets elsewhere like the U.S. where retail players operating with leverage have become a bigger component of trading volume the same effect may become a feature.
You can find the paper via the following link Same-Weekday Momentum: New Evidence from China’s A-Share Market.
Happy Sunday.