Behavioral finance interpretation of momentum effect.

It is one debating point between traditional and behavioral financial theories why momentum effect persists in most financial markets. In view of Chinese stock markets' features, this paper constructs "relative price" momentum portfolios based on "anchoring bias" and "disposition effect" in behavioral financial theories, and explores the relationship among these new momentums and classical momentums. The results show after controlling the classical momentum effect and systematic risk factors, the relative price momentum effect still exists. However, after controlling the relative price momentum effect, the classical momentum effect disappears. If considering transaction costs, investors could not benefit from the momentum strategies. These findings indicate that "anchoring bias" and "disposition effect" are important reasons of momentum effect in Chinese stock markets' features, and high transaction costs hinder the arbitrary. [ABSTRACT FROM AUTHOR]