Winners-losers long term reversal in the Chinese stock market : a dissertation submitted in partial fulfilment of the requirements for the degree of Bachelor of Commerce with Honours at Lincoln University

Abstract

This paper shows that contrarian strategy is applicable for trading long term in China's stock market. This was due to evidence that China's stock market showed a winner-loser long term reversal. It was found that a zero investment portfolio that buys the past 36 months’ loser stocks and short-sells the past 36 months’ winner stocks produced positive profits due to the reversal effect. After the 36-month holding period, past loser stocks gave higher monthly mean returns than past winner stocks. This was especially evident for Type A stocks and stocks from the Shanghai Stock Exchange (SSE). The reversal was due to overreaction factors. The way investors received and used information influenced the reaction they had towards news and their actions in trading. This also posed a challenge to market efficiency. In addition, there was also a possible value-growth characteristic attributable to the stocks traded in China. Furthermore, analysis using the book-to-market ratio showed that high book-to-market stocks (which were usually loser and value stocks) gave higher monthly mean returns than lower book-to-market stocks (which were usually winner and growth stocks). The reversal did not seem to be concentrated only on the month of January due to the tax avoidance incentives; making the contrarian strategy applicable throughout the whole year.