Momentum trading,mean reversal and overreaction in Chinese stock market |
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Authors: | Yangru Wu |
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Institution: | (1) Rutgers Business School-Newark and New Brunswick, Rutgers University, 1 Washington Park, Newark, NJ 07102, USA;(2) Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China |
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Abstract: | The vast majority of the literature reports momentum profitability to be overwhelming in the US market and widespread in other
countries. However, 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 1 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 support the overreaction hypothesis. |
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