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Momentum and Contrarian Strategies in the Chinese Stock Market

Author:
Zhe Jiang  


Issue Date:
2012


Abstract(summary):

To sum up, the relative-strength portfolio presents mixed results of both contrarian and momentum effects in the Chinese stock market. The momentum effects are relatively weak in China. Within very short run, potential momentum profits exist but insignificant. The contrarian effects are stronger than momentum effects. The market captures contrarian profits in the short to medium run (normally from 1 month to 9 month holding when ranking are based on less than 6-month past performance). Long formation periods are more likely to generate positive returns. Past winner stocks tend to outperform the past losers when evaluates the past performance for longer than half year. However, most strategies are statistically insignificant. Even though there are differences existed between holding with one-week delay after formation and holding immediately after formation, our empirical result presents common trends of the momentum and contrarian effects. Comparing the SHSE and SZSE, the results are similar to the complex A share market. Nevertheless, Shanghai displays a strong contrarian effect in terms of both depth and length for the short to medium run portfolio holding, while momentum strategies works better in Shenzhen, which is more influenced by the international market. As SHSE takes two third of the total market capitalization in the complex A share market, the results of these two markets are almost in the same direction. The relative strength portfolio presents very different results in the period of crises. Momentum effects strongly increase. The past high return stocks perform better in the economic downturn. Especially, all our strategies generate high momentum profits together with a strong accumulation effects in the time of Asian crisis. However, there are several significant market changes in the past twenty years, which influences the forecasting of our crises analysis. The empirical evidence in China diverges surprisingly from the developed market, and the derivation can be explained by China’s very special market situation, such as individual investors, market specific development and government regulatory control, together with the behavioural explanation of market over/under-reactions. Our result is consistent with the behavioural models by Barberis et al. (1997), Daniel et al. (1998) and Hong and Stein (1999). Moreover, our empirical analysis generally confirms the paper of Wu (2011) in the aspects of the weak momentum, the presence of contrarian effect and the stronger momentum in SZSE. Nonetheless, there are several limitations in our research. First, we take zero transaction cost in our winner-loser portfolios, while the real transaction fees in China varies from 0.1% to 12.0% in the past twenty years. Second, stocks with less than four-year records are excluded in our sample data. These stocks are potentially very new stocks or stocks with bad past performance that exit the market after a few years on public. These may also give bias in the sample data selection. Last but not least, in our sub-period analysis, the time span for the Asian crisis is relatively short regarding the year long holding and formation periods, which may, possibly, affect the statistical result.


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