Investigation of contrarian strategies in the China market.

Abstract

This study investigates the existence of contrarian profits in China stock markets when we buy losers and sell winners. The findings show that in the absence of transaction costs, short-term contrarian strategies do not generate significant profits, whereas significant intermediate and long-term contrarian profits exist. We carry out a two-stage regression to control for risks identified by the Fama and French three-factor model and establish that past returns are predictive of future returns. Our results are robust when using Fama and MacBeth regression. Taken together, our findings suggest that long-term contrarian profits exist in the China stock markets.