Noise Trading, Momentum Effect and Momentum Strategy

Abstract

Abstract: The momentum effect has long existed in global stock, bond, currency and commodity markets. At the same time, momentum strategy, as an important trend strategy, has been widely used in financial products such as CTA, ETF and other financial products. However, the traditional financial theory system cannot explain the financial vision of momentum effect. Based on the noise trading theory, this paper introduces momentum traders and constructs an extended noise trading theory model to re-explain the momentum effect of the Chinese stock market. Then, based on the performance of noise trading on momentum effect, a noise trading factor is added to the traditional Jegadeesh and Titman's momentum strategy construction method, and a new noise trading based momentum strategy is constructed using the SSE 180 index component data. The results show that: for stocks with a high level of noise trading, investors should choose a momentum strategy; for stocks with a low level of noise trading, investors should choose a reversal strategy.

Key words: noise trading, NTR, momentum effect, momentum strategy

Yao Yuan, Zhong Qi, Zhai Jia. Noise Trading, Momentum Effect and Momentum Strategy[J]. Management Review, 2021, 33(2): 44-54.

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