Wax and wane of the cross-sectional momentum and contrarian effects: Evidence from the Chinese stock markets

Abstract

This paper investigates the time-varying risk-premium relation of the Chinese stock markets within the framework of cross-sectional momentum and contrarian effects by adopting the Capital Asset Pricing Model and the FrenchFama three factor model. The evolving arbitrage opportunities are also studied by quantifying the performance of time-varying cross-sectional momentum and contrarian effects in the Chinese stock markets. The relation between the contrarian profitability and market condition factors that could characterize the investment context is also investigated. The results reveal that the risk-premium relation varies over time, and the arbitrage opportunities based on the contrarian portfolios wax and wane over time. The performance of contrarian portfolios are highly dependent on several market conditions. The periods with upward trend of market state, higher market volatility and liquidity, lower macroeconomics uncertainty are related to higher contrarian profitability. These findings are consistent with the Adaptive Markets Hypothesis and have practical implications for market participants.

Industry- and liquidity-based momentum in Australian equities

“…If momentum can be shown to be prevalent across markets-even those of different calibers-it may be considered a systematic risk factor, and its exposure should be compensated in the form of different mean returns. As implied by the adaptive markets hypothesis (Lo 2004), as well as subsequent research in the same vein (Shi and Zhou 2017), the performance of trading strategies may change over time due to time-varying and path-dependent risk premiums. This implies that traders need to adapt to changing market conditions to achieve better performance.…”

Cross‐shareholding networks and stock price synchronicity: Evidence from China

“…Lo (2004) sheds a light on the changing market environment and suggests that the risk/reward relation in the stock market always varies. Based on the Adaptive Markets Hypothesis of Lo (2004), Shi and Zhou (2017a) and Shi and Zhou (2017b) confirm that trading strategies constructed based on contrarian effects would fail in Chinese stock market under certain market conditions. Considering that the impact of noise trading would differ from one certain market condition to another, we next investigate the impact of cross‐shareholding on stock prices in separate market environment.…”

Does the Adaptive Market Hypothesis explain the evolution of emerging markets efficiency? Evidence from the Moroccan financial market

“…The empirical results exhibit that both the four calendar effect's performance and excess returns of the investment strategies appear from time to time, which suggest that the AMH provides a better explanation for the market dynamics in China stock market. In the same market, Shi and Zhou (2017) quantify the evolving performance of trading strategies based on cross-sectional contrarian effects in the Chinese stock markets. They find that trading strategies based on contrarian portfolios wax and wane over time and are dependent on market conditions.…”

“…In fact, on the one hand, some studies report results that confirm the EMH ( Ayadi and Pyun, 1994 ; Cheung and Andrew Coutts, 2001 ; Fama, 1970 ; Granger and Morgenstern, 1963 ; Hawawini, 1984 ; Lock, 2007 ; Poon, 1996 ; Stachowiak, 2004 ). On the other hand, other studies highlight the departure from random walk ( Al-Ajmi and Kim, 2012 ; Bley, 2011 ; Butler and Malaikah, 1992 ; Claessens et al., 1995 ; Jarrett, 2010 ; Lovatt et al., 2007 ; McPherson et al., 2005 ; Smith, 2012 ; Squalli, 2006 ) as well as the existence of profitable investment strategies ( Asem and Tian, 2010 ; Cheema and Nartea, 2017 ; Chopra et al., 1992 ; Cooper et al., 2004 ; De Bondt and Thaler, 1985 ; Jegadeesh and Titman, 2001 ; Lakonishok et al., 1994 ; Shi and Zhou, 2017 ). Furthermore, the contradiction has been seen even in the same market such as the Latin American markets ( Claessens et al., 1995 ; Ojah and Karemera, 1999 ).…”

“…Therefore, unlike the EMH which argues that the active management is worthless and it couldn't do better than the “buy and hold strategy”, the AMH justifies the active management of the portfolio. Several studies focus on testing the profitability of investment strategies, however few of them have inspected such profitability within the AMH framework ( Al-Khazali and Mirzaei, 2017 ; Shahid and Sattar, 2017 ; Shi and Zhou, 2017 ; Todea et al., 2009 ; Urquhart and McGroarty, 2014 ; Xiong et al., 2019 ). For instance, Urquhart and McGroarty (2014) examine the implied investment strategies based on calendar anomalies to investigate the AMH in the US using daily and monthly indexes from 1900 to 2013 with subsamples and moving window analysis.…”