Contrarian and momentum strategies in China stock market: 1993-2000

Using “A” shares accessible only to local investors (who account for 99% of stock investors in China), this paper tests if short-horizon contrarian and intermediate-horizon investment strategies generate abnormal profits. We find statistically significant abnormal profits for both the arbitrage portfolio-investment strategies. Detailed analysis indicates that: (1) an absolute dominance of non-institutional investors leads to an environment of excessive speculation and hence excessive overreaction to firm-specific information; (2) the overreaction to firm-specific information is the single most important source of the shortterm contrarian profit; (3) the stock returns in the intermediate horizon exhibit lagged overreaction to common factors; and (4) the lead-lag overreaction to common factor is the major reason behind the intermediate-term momentum profit. These findings are robust, among other things, to bid-ask spread and nonsynchronous trading. JEL classification: G14; G15