The vast majority of the literature reports momentum profitability to be overwhelming in the US market and widespread in other countries. However, this paper finds that the pure momentum strategy in general does not yield excess profitability in the Chinese stock markets. We find instead strong mean reversion with an average half-life slightly shorter than 1 year. A pure contrarian investment strategy produces positive excess returns and in general outperforms the pure momentum strategy. Furthermore, momentum may interact with mean reversion. A strategy based on the rolling-regression parameter estimates of the model combining mean reversion and momentum generates both statistically and economically significant excess returns. The combined strategy outperforms both pure momentum and pure contrarian strategies. We conduct a number of robustness tests and confirm the basic findings. Collectively, our results support the overreaction hypothesis.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Sep 25, 2010
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