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

Using data on "A" shares, accessible only to local investors in China, we find statistically significant abnormal profits for some short-horizon contrarian and intermediate-horizon momentum strategies. Further analysis indicates that: (1) overreaction to firm-specific information is the single most important source of short-term contrarian profits; (2) the intermediate-term momentum profits are not, however, distinct due to the dominance of overreaction effect; and (3) the negative cross-serial correlation contributes to momentum profits. The lead-lag structure in China is unique in that (i) lag firms follow lead firms in the opposite direction and (ii) large firms lead small firms in holding periods from 1 to 8 weeks, while small firms lead large firms in holding periods from 12 to 26 weeks. These findings are robust to bid-ask spread and nonsynchronous trading, time-varying market risk and firm-size effect.