Momentum and Reversal Heterogeneity between A-Shares and Hong Kong Stocks

Abstract

Momentum and reversal effects are two prominent anomalies pervasive in financial markets, manifesting distinctly across different markets. Through comparative analysis, this paper elucidates the differences between China’s mainland A-share market and the Hong Kong stock market, examining their heterogeneous characteristics in momentum and reversal effects along with the underlying formation mechanisms to inform investment strategy development. Long-term observations reveal nearly antithetical price patterns between the A-share and Hong Kong markets - the A-share market is dominated by significant short-term reversal effects, where previously underperforming portfolios substantially outperform past winners, whereas the Hong Kong market exhibits robust medium-term momentum effects, with the outperformance of previously profitable portfolios persisting. Analysis of driving factors identifies market structure, investor behavior, trading mechanisms, and market volatility characteristics as fundamental determinants of crossmarket heterogeneity. This pronounced contrast establishes these markets as an ideal laboratory for investigating market heterogeneity. Furthermore, this paper highlights the absence of a unified framework in current behavioral finance theories to adequately explain momentum and reversal effects in both markets, thereby offering fresh perspectives for understanding the interactive relationships and evolutionary trajectories of these anomalies across markets.