Industry momentum with correlation consolidation: evidence from China

Sabri Boubaker, Lechuan Du and Zhenya Liu ()
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Lechuan Du: Renmin University of China
Zhenya Liu: Renmin University of China

Journal of Asset Management, 2022, vol. 23, issue 1, No 6, 73-82

Abstract: Abstract Momentum-based strategies are widely used by asset managers and have attracted considerable research interest. This paper studies industry momentum from the perspective of correlation consolidation, which consolidates industries according to the correlation coefficient of their historical returns and assesses momentum effects after the consolidation. Studying all Chinese stocks listed on the Shanghai and Shenzhen A-share market with a sample range from June 1, 2007, to December 31, 2020, empirical results show that monthly returns of the industry momentum and Sharpe ratio after the correlation consolidation both increase. The optimal method for consolidating industries is to use the correlation coefficient of 0.75, which increases the Sharpe ratio from 0.71 before the correlation consolidation to 1.16.

Keywords: Momentum effect; Industry momentum; China stock market; G11; G14 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1057/s41260-021-00248-8

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