The state of the market and the contrarian strategy: evidence from China's stock market

Abstract

Using the most comprehensive weekly dataset of 'A' shares listed on the Chinese stock market, this paper examines short-term contrarian strategies under different market states from 1995-2010. We find statistically significant profits from contrarian strategies, especially during the period after 2007, when China (along with other countries) experienced an economic downturn following the worldwide financial crisis. Our empirical evidence suggests that: (1) no significant profit is generated from either momentum or contrarian strategies in the intermediate horizon;(2) after microstructure effects are adjusted for, contrarian strategies with only four to eight weeks holding periods based on the stocks' previous four to eight week's performance generate statistically significant profits of around 0.2% per week; (3) the contrarian strategy following a 'down' market generates higher profit than those following an 'up' market, suggesting that a contrarian strategy could be used as a shelter when the market is in decline. The profits following a 'down' market are robust after risk adjustment.

Mean reversion in international markets: evidence from G.A.R.C.H. and half-life volatility models

“…Therefore, the mean reversion phenomenon provides an opportunity to investors to forecast the future values of the equity returns on the basis of past values. These findings are also consistent with previous literature (Al-Hajieh, 2017;Chaudhuri & Wu, 2003;Chaves & Viswanathan, 2016;Chen et al, 2012;Mohammadi, 2017;Riaz, 2014). The results of the present study further determined the speed of mean reversion of emerging and developed stock markets by using the half-life method.…”

“…If the stock returns follow the mean reversion then it is easy to predict the future returns of the stocks on the basis of past information, which is the most important reason behind these studies (Gulay & Emec, 2017). According to Mohammadi (2017), Chaves and Viswanathan (2016), Hart et al (2015), Tsekrekos and Yannacopoulos (2016), Lubnau and Todorova (2015) and Balvers, Wu, and Gilliland (2000), the mean reversion process provides an opportunity to earn more profit because investors buy stocks at the lowest prices and sell them when they become more profitable by using the constrained trading strategy (Chen, Jiang, & Li, 2012). Substantial work was carried out by Neaime (2015) and Hakim and Neaime (2003), who reviewed the mean reversion behaviour of stock markets of Middle East and North African (M.E.N.A.)…”

“…Ribeiro et al (2017), Ahmad et al (2016), and Kim, Morley, and Nelson (2001) also studied the behaviours of stocks and volatility, and they have also concluded the direct relationship between stock returns and the volatility. Arefin and Ahkam (2017), Chen et al (2012), and Balsara, Chen, and Zheng (2007) concluded that the investors should use the constrained trading strategy to get maximum profit because of the mean reversion process. Chaudhuri and Wu (2003) studied the behaviour of stock returns in 17 emerging markets.…”

Impact of Credit Risk on Momentum & Contrarian Strategies: Evidence from South Asian Markets

“…They suggested contrarian strategy is a better option during the growth period because stocks are overrated during growth period as compared to standard market index. Chen et al (2012) test the short term under market states contrarian strategy by using weekly dataset of A shares from 1995 to 2010 that are listed on Chinese stock exchange. They found that contrarian profits are significant especially after 2007 when china along with the world faced financial crisis.…”

Speed of Mean Reversion: An Empirical Analysis of Kse, Lse and Ise Indices

“…The debate of mean reversion has been going since the 1970s. As the literature gave both evidence in support and against of mean reversion (e.g., Chen, Hsu 2016;Oikarinen, Schindler 2015;Hart et al 2015;Annaert, Hyfte 2005;Borges 2011;Chaudhuri, Wu 2003;Lock 2007;Hakim, Neaime 2003;Yilanci 2012;Chen et al 2012;etc.). However, the literature fails to provide enough evidence of mean reversion in stock markets indices of Pakistan.…”