Momentum and Contrarian Trading Strategies: Evidence from the Chinese stock market 2000-2010

Abstract: The paper employs Jegadeesh and Titman (1993)’s overlapping ranking period method to build winner-portfolio and loser-portfolio, and thereafter conducts empirical studies on the momentum and contrarian effects on the Chinese stock market from 2000 to 2010. One thing worth mentioning here is that the author processes the data using her own Matlab codes instead of doing tremendous manual work. It is found in this paper that the Chinese stock market has short-term features, and is mainly characterized by a strong contrarian effect and supplemented by a weak momentum effect, and the whole market exhibits a unilateral feature. In the short and medium term, the contrarian effect is significant in the Chinese stock market; with the extension of the holding period, however, the contrarian effect weakens and certain momentum effects become significant. In addition, the paper has tried to analyze the causes of the momentum and contrarian effects on the Chinese stock market. First, within the efficient market paradigm, the author uses CAPM to adjust for portfolio risk, and finds that this model cannot explain the two effects. Second, the two effects are analyzed from the perspective of behavioral finance. The empirical studies reveal that the underreaction of investors results in a momentum effect, and their overreaction results in a contrarian effect.