Momentum Trading, Mean Reversal and Overreaction in Chinese Stock Market

HKIMR Working Paper No. 23/2004

23 Pages Posted: 23 Aug 2007

See all articles by Yangru Wu

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: December 2004

Abstract

While the vast majority of the literature reports momentum profitability to be overwhelming in the U.S. market and widespread in other countries, 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 one 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 seem to support the overreaction hypothesis.

Keywords: Chinese Stocks, Mean Reversal, Momentum, Overreaction

Suggested Citation

Wu, Yangru, Momentum Trading, Mean Reversal and Overreaction in Chinese Stock Market (December 2004). HKIMR Working Paper No. 23/2004, Available at SSRN: https://ssrn.com/abstract=1009054 or http://dx.doi.org/10.2139/ssrn.1009054

Yangru Wu (Contact Author)

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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