Abstract
We study the contrarian and trend-following trading behavior of market timers in China's stock market. Using a network model to describe interpersonal relationships, we deploy the Ising model to capture trading strategies for both contrarians and followers. With empirical data of China's stock market, we find that contrarians account for 12-14% of trading volume. We further compare the performance of contrarians and followers and demonstrate the inefficiency of China's stock market where timing arbitrage exists. We highlight the fact that while the actual return sequence is driven by followers, the contrarians seize a lot of profitable arbitrage opportunities.
Highlights
IntroductionThe majority of the investors are individuals instead of institutional investors
In many emerging markets, the majority of the investors are individuals instead of institutional investors
With empirical data of China's stock market, we find that contrarians account for 12-14% of trading volume
Summary
The majority of the investors are individuals instead of institutional investors. To study the strategies of investors characterized by different emotions and attitudes, many works adopt concepts from network-based dynamics [4,5,6] and the Ising model [7,8,9,10]. These models assume that the long-term yield of a stock is mainly determined by its economic fundamentals, whereas short-term fluctuations of its price are mostly influenced by investors’ sentiments or opinions. Few studies have quantitatively explored the composition of the real market, how the behavior of different investors drives the market price
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