Contrarian and momentum strategies and "Stir-Frying" in the Chinese stock markets

Abstract

This paper examines the stock return patterns in Chinese stock markets by testing whether momentum or contrarian exists in short and intennediate time horizon. Using sample stocks from Shanghai Stock Exchange and Shenzhen Stock Exchange we find that both short-term contrarian and intennediate-tenn momentum profits can be observed. Risk is not an explaining factor for the source of contrarian profits. Although some momentum profits can be explained by cross varying expected returns, overreaction to finn specific infonnation is the sole source of contrarian profits. Stocks also overreact to the common factor but in a lagged manner and nearly half of the momentum profits come from the stocks' lead-lag reactions to the common factor.