Contrarian and momentum strategies in the China stock market: 1993–2000

Abstract

Using data on “A” shares, accessible only to local investors in China, we find statistically significant abnormal profits for some short-horizon contrarian and intermediate-horizon momentum strategies. Further analysis indicates that: (1) overreaction to firm-specific information is the single most important source of short-term contrarian profits; (2) the intermediate-term momentum profits are not, however, distinct due to the dominance of overreaction effect; and (3) the negative cross-serial correlation contributes to momentum profits. The lead–lag structure in China is unique in that (i) lag firms follow lead firms in the opposite direction and (ii) large firms lead small firms in holding periods from 1 to 8 weeks, while small firms lead large firms in holding periods from 12 to 26 weeks. These findings are robust to bid–ask spread and nonsynchronous trading, time-varying market risk and firm-size effect.