Relative strength strategies in China's stock market: 1994–2000

Abstract

In this paper, we examine the profitability of intermediate- and long-horizon relative strength strategies (buying past winners and selling past losers) over the July 1994–December 2000 interval in China's stock market. We find a negative average return to relative strength strategy over a horizon of 6 months to 2 years. We also document that firm size, book-to-market, and beta effects are qualitatively similar to those in the US and other markets, that is, small stocks outperform large stocks, value stocks outperform growth stocks, and betas do not appear to be associated with average stock returns. Further, we show that, when returns are adjusted for the three factors in Fama and French [J. Financ. Econ. 33 (1993) 3], the predictable pattern in returns disappears. Hence, the stock return behavior in China is not inconsistent with the rational risk-based pricing model.