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Fractal momentum investment strategies based on liquidity non-linear fluctuations in Chinese stock market

Ruzhen Yan (School of Business, Chengdu University of Technology, Chengdu, China)
Xin Zhu (School of Business, Chengdu University of Technology, Chengdu, China)
Kun Wang (School of Business, Chengdu University of Technology, Chengdu, China)
Fanming Ma (University of Wollongong, Wollongong, Australia)
Xu Wu (School of Business, Chengdu University of Technology, Chengdu, China and Post-Doctoral Research Station of Management Science and Engineering, Chengdu University of Technology, Chengdu, China)

Journal of Chinese Economic and Foreign Trade Studies

ISSN: 1754-4408

Article publication date: 29 October 2024

Issue publication date: 15 November 2024

28

Abstract

Purpose

This paper aims to the relationship between liquidity fluctuation trends and stocks’ expected returns.

Design/methodology/approach

The authors use the multi-fractal detrended fluctuation analysis to study the liquidity non-linear multi-fractal characteristics of stock market and predict the future volatility trend of market liquidity with the help of potential entropy dimensional model and also consider the non-linear volatility trend of liquidity, construct a fractal momentum strategy under different sorting periods and holding periods, to test the liquidity momentum effects of Chinese stock market and, finally, compare with the traditional price momentum strategy.

Findings

The result suggests that: Chinese stock market liquidity has obvious non-linear multi-fractal characteristics; the trend entropy dimensional model can accurately predict the future volatility trend of market liquidity; significant liquidity trend momentum effects persist in the Chinese stock market, while price momentum effects exist only in the short term; a significant liquidity premium exists in the Chinese equity market; the fractal momentum strategy constructed in this paper achieves higher returns and less risk than the price momentum strategy.

Originality/value

Based on the above analysis, this paper will further construct a momentum strategy incorporating liquidity trends, i.e. fractal momentum strategy (LMP strategy), with the realistic background that Chinese stock market liquidity has non-linear multi-fractal characteristics – the main contribution of this paper is to overcome the shortcomings of existing momentum strategies, which seldom combine the trend of future liquidity fluctuations with momentum strategies, and to incorporate the real characteristics of the market.

Keywords

Acknowledgements

This research is financially supported by the National Natural Science Foundation of China (71903017). The authors are solely responsible for any errors or omissions herein.

The data that support the findings of this study are available in iFinD database at http://ft.10jqka.com.cn/index.php?c=index&a=iFinDPC.

Citation

Yan, R., Zhu, X., Wang, K., Ma, F. and Wu, X. (2024), "Fractal momentum investment strategies based on liquidity non-linear fluctuations in Chinese stock market", Journal of Chinese Economic and Foreign Trade Studies, Vol. 17 No. 2/3, pp. 193-219. https://doi.org/10.1108/JCEFTS-12-2023-0063

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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