Abstract
This paper reexamines the profitability of loser, winner and contrarian portfolios in the Chinese stock market using monthly data of all stocks traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange covering the period from January 1997 to December 2012. We find evidence of short-term and long-term contrarian profitability in the whole sample period when the estimation and holding horizons are 1 month or longer than 12 months and the annualized return of contrarian portfolios increases with the estimation and holding horizons. We perform subperiod analysis and find that the long-term contrarian effect is significant in both bullish and bearish states, while the short-term contrarian effect disappears in bullish states. We compare the performance of contrarian portfolios based on different grouping manners in the estimation period and unveil that decile grouping outperforms quintile grouping and tertile grouping, which is more evident and robust in the long run. Generally, loser portfolios and winner portfolios have positive returns and loser portfolios perform much better than winner portfolios. Both loser and winner portfolios in bullish states perform better than those in the whole sample period. In contrast, loser and winner portfolios have smaller returns in bearish states, in which loser portfolio returns are significant only in the long term and winner portfolio returns become insignificant. These results are robust to the one-month skipping between the estimation and holding periods and for the two stock exchanges. Our findings show that the Chinese stock market is not efficient in the weak form. These findings also have obvious practical implications for financial practitioners.
Highlights
The Efficient Markets Hypothesis is a cornerstone of modern finance [1, 2]
Since the features of A-shares listed on these two stock exchanges are not similar, we investigate the momentum and contrarian effects in the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) independently
On the basis of decile grouping for SHSE stocks, the CON(1,1) portfolio produces an annual return of 12.8%, the return of the CON(6,6) portfolio decreases to 1.1%, and the profit of the contrarian portfolios keep rising to 19.7% for CON(48,48) with increasing horizon J
Summary
The Efficient Markets Hypothesis is a cornerstone of modern finance [1, 2]. there is accumulating evidence for the presence of market anomalies, such as the momentum effect and the contrarian effect. Using monthly data of 53 individual stocks listed on the SHSE and the SZSE from January 1993 to December 2000, Wang and Zhao discover a statistically significant contrarian effect with the estimation period ranging from 1 to 3 years and the holding period from 1 to 5 years [27]. Based on A-share data in the SHSE and the SZSE from January 1995 to December 2001, Zhu et al verify the presence of a significant momentum effect with both estimation and holding periods less than 4 weeks [38]. We use monthly return data of all A-shares listed on the SHSE and the SZSE from January 1997 to December 2012 to construct the winner and loser portfolios, forming zero-cost arbitrage portfolios. Empirical analysis in this study fails to verify any significant differences between the results of the two exchanges
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