The momentum effect on Chinese real estate stocks: Evidence from firm performance levels

This paper investigates the momentum effects under different firm performance levels for Chinese real estate stocks using quantile regression with a dummy variable estimator. This paper finds that regardless of the momentum horizon, the momentum effects are positive under high-performing individual stocks, but they are negative under low-performing individual stocks. While prior literature only finds that this asymmetric phenomenon appears under different market states, and the findings on different horizons are inconsistent. Furthermore, this paper finds that the positive (negative) momentum effect under high (low) firm performance levels is stronger than that under bullish (bearish) markets. This implies that superior (inferior) fundamental business performance and bullish (bearish) markets can cause the stock prices to go up (down); however, the effect of the former is stronger than that of the latter. Moreover, this paper finds that the relation between future returns and past turnover ratios is positively correlated under high-performing stocks, but negatively correlated under low-performing stocks. Based on the above findings, this paper regards past turnover ratios as a leading indicator of stock returns and suggests two profitable investment portfolios which are superior to the average returns of real estate stocks.

► We study the momentum effects under firm performance levels by quantile regression. ► The momentum effects are positive (negative) for high (low)-performing stocks. ► The momentum effects under firm performance levels are stronger under markets states. ► We use the past turnover ratio as a leading indicator to form profitable portfolios.