Testing Momentum and Reversal Strategies in the Volatile New Energy Sector of China’s A-Share Market

Abstract

The new energy sector, being a strategic emerging area in China’s capital market, with its characteristics of high volatility and high attention, provides a special scenario for studying behavioral finance strategies. Based on the momentum and reversal effects from behavioral finance theory, this paper conducts an empirical test on the performance differences between these two strategies, specifically for the A-share new energy sector. The research picks 50 representative new energy component stocks from 2020 to 2023 as the sample. Considering a one-way transaction cost of 0.1%, it builds and backtests a short-term reversal strategy (using past 5-day returns) and a medium-term momentum strategy (using past 20-day returns). The results show that the reversal strategy is significantly better than the momentum strategy and the buy-and-hold benchmark in terms of annualized return (18.7% vs 12.3%), Sharpe ratio (0.71 vs 0.43), and maximum drawdown control (-28.6% vs -35.2%). More analysis indicates that policy announcement events can cause market overreactions, thus creating noticeable profit windows for the reversal strategy, which can get a cumulative excess return of up to 4.1% within 5 days after policy release. Cost sensitivity tests reveal that transaction costs have a decisive effect on the strategy’s net returns. The conclusion of this paper suggests that in the new energy sector, dominated by retail investors and highly sensitive to policies, the reversal strategy has more practical value because it can effectively use the market’s short-term pricing biases, offering important strategy references for investors.