Contrarian investment strategies : evidence in China stock market 2002-2011

Abstract

This master thesis aims to investigate the profitability of momentum and contrarian investment strategies in Chinese “A” share market listed on both the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) from 2002 to 2011. We examined 81 strategies with various horizons based on weekly stock return. Results suggest that contrarian strategies are more likely to be successful than momentum strategies. Short- and medium-term contrarian strategies yield statistically significant abnormal profit up to 2.2% per month, however, profitability decreases as holding period gets longer. Further analysis indicates that (1) time-varying market risk could be a source of contrarian profits, but not a major one; (2) Overreaction does not contribute to contrarian profits; (3) the lead-lag structure effect is mainly responsible for contrarian profits. Keywords: contrarian strategy, China “A” shares, overreaction, lead-lag structure, decomposition model.