The state of the market and the contrarian strategy: evidence from China's stock market

Qiwei Chen, Ying Jiang, Yuan Li

    Research output: Journal PublicationArticlepeer-review

    12 Citations (Scopus)

    Abstract

    Using the most comprehensive weekly dataset of 'A' shares listed on the Chinese stock market, this paper examines short-term contrarian strategies under different market states from 1995-2010. We find statistically significant profits from contrarian strategies, especially during the period after 2007, when China (along with other countries) experienced an economic downturn following the worldwide financial crisis. Our empirical evidence suggests that: (1) no significant profit is generated from either momentum or contrarian strategies in the intermediate horizon; (2) after microstructure effects are adjusted for, contrarian strategies with only four to eight weeks holding periods based on the stocks' previous four to eight week's performance generate statistically significant profits of around 0.2% per week; (3) the contrarian strategy following a 'down' market generates higher profit than those following an 'up' market, suggesting that a contrarian strategy could be used as a shelter when the market is in decline. The profits following a 'down' market are robust after risk adjustment.

    Original languageEnglish
    Pages (from-to)89-108
    Number of pages20
    JournalJournal of Chinese Economic and Business Studies
    Volume10
    Issue number1
    DOIs
    Publication statusPublished - Feb 2012

    Keywords

    • China stock market
    • common factor
    • contrarian and momentum
    • market states
    • overreaction

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance (all)

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