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Jie Xu

Diplômé DBA - 2008

Titre de thèse

Essays on Momentum and Contrarian Strategies In China Stock Market

Superviseur(s)

Dominique Thevenin
The modern U.S. credit and liquidity crisis contributed to global market volatility, yet China’s stock market performance, as measured by the Shanghai A-Share index, has remained relatively uncorrelated with the wider events. Consequently, the Chinese stock market has attracted great attention as a means to increase returns and possibly diversify portfolio risk. Can such investment strategies earn abnormal returns adjusted for risk, or does the efficient market hypothesis hold true for China? Building on prior literature, this study probes the value of momentum and contrarian investment strategies with respect to the increasingly influential but volatile Chinese stock market. This thesis contains four sections: a literature review, an investigation of price momentum in the Chinese market; consideration of style-level momentum strategies; and an analysis of contrarian (price/value) strategies. Regarding the price momentum strategy, this study considers the “naïve” and volume-based price momentum strategies. The empirical findings show that price momentum exists in the low volume portfolio of the Chinese stock markets. Specifically, holding a low volume winner portfolio can outperform the market portfolio in the medium horizon. Risk factors are not sufficient to explain the abnormal returns, and the empirical results are consistent with the gradual information diffusion model. “Style momentum trading funds” act as momentum traders when entering the market but as contrarian traders when exiting. The rapid trading behavior of funds also accelerates stock prices toward their fundamental intrinsic value. However, multiple and simple style momentum strategies can earn statistically significant profits. A buy-and-hold approach for a style winner portfolio significantly outperforms the market portfolio in Chinese markets. Institutional investors may benefit from a style momentum approach that involves the largest 50% of Chinese stocks. Traditional risk factors cannot explain the style momentum, and the decomposition of strategy profits implies a predictability of stock return. For the price contrarian strategy, this study compares short-term, long-term, and parametric versions. There are statistically significant profits for a short-term contrarian strategy; overreaction to firm-specific information is the most important source of short-term contrarian profits. The introduction of turnover shock significantly optimizes the contrarian strategy. A long-term contrarian strategy can earn statistically significant profits, and buying and holding losing portfolios can significantly outperform the market portfolio. A single, time-varying risk cannot explain long-term contrarian results, though Fama and French’s (1998) three-factor model explains it well. For the parametric contrarian strategy, evidence confirms the long-term reversal effect; a one-step ahead portfolio with the highest expected return significantly outperforms the market portfolio. An addition