The Left-tail Momentum of The Chinese Stock Market

Abstract

In the research on the correlation between "risk and return", the capital pricing model and arbitrage pricing model have always occupied an important position, but in recent years, when the research market continues to expand and the research indicators are constantly enriched, the negative correlation between tail risk and cross-sectional returns of stocks has received more and more attention. Studies have used data from the U.S. stock market to find that the relationship between the left-tail risk of individual stocks and their cross-sectional returns is significantly negatively correlated, that is, stocks with higher left-tail risk have lower future returns. This finding contradicts the positive correlation between return and risk under traditional financial research, and then promotes the formation of left-tail risk anomalies. However, compared with the US stock market, the overall development time of China's stock market is relatively short, there are many retail investors, and market participants often do not have professional investment knowledge, so information asymmetry prompts blindly following market participants to invest irrationally like a herd, and most of the anomalies in asset pricing can be explained from the perspective of behavioral finance. Therefore, this paper draws on his research ideas to examine whether there is left-tailed momentum in the Chinese stock market, and whether the company characteristic indicator can strengthen this relationship and explain it through behavioral finance. This paper studies the period from January 1, 2000 to December 31, 2022, and aims to explore the cross-sectional correlation between left-tail risk and stock return in the coming month, using the return of all stocks in the Shanghai and Shenzhen markets to measure left-tail risk at risk. Firstly, the fundamental relationship between risk and return is explored through univariate combination analysis, and then the role and marginal contribution of company characteristic indicators on the relationship between risk and return are considered from the perspective of behavioral finance, considering common company characteristic indicators, such as book-to-market capitalization ratio, and indicators linked to poor investor information, such as analyst coverage, etc., to consider the role of corporate characteristic indicators on the relationship between risk and return from the perspective of behavioral finance. The results show that there is a significant left-tail momentum in China's stock market, that is, there is a negative correlation between left-tail risk and expected return, and the phenomenon of left-tail risk is more obvious in stocks with retail holdings and low analyst attention. When the yield is adjusted by the four-factor model, the performance of the left-tail momentum effect will be significantly strengthened, which is significantly better than the traditional capital asset pricing model and the three-factor model. In the research sense, frequent "black swan" events have made investors pay more and more attention to the huge risk contagion chain behind small probability events or extreme events, and at the same time suggest that the tail risks of relevant government departments may pose a major threat to the systematic smooth and orderly operation of the entire financial market.