Market Efficiency and Momentum Strategy in China Stock Market after Year 2003

Abstract: we processed weak-form tests of efficient market hypothesis and examined whether momentum/contrarian strategy is profitable in China “A” stock market after 2003. It is assumed that the step-by-step financial liberalization realized according to the commitment made in the participation of World Trading Organization would change the efficiency of stock market in China. The results of the study indicate there is improvement in the size and liquidity of market in the financial liberalization. Stock index in Shanghai Exchange “A” shares behaves mean-reversion before year 2001 while mean-aversion after year 2003. However, this does not necessarily imply that momentum strategy is useful for the market during year 2003 to 2007. Conversely contrarian strategy performs much better than momentum. One possible reason is that stock index is usually affected by big-cap companies, while in momentum and contrarian strategy test more small-cap firms are selected to form portfolios as their prices waved in a larger range. Therefore the stock index and individual portfolios exhibit different characteristics in mean-aversion and reversion.