Momentum, Contrarian And Market States

Momentum means past winners(losers) continue to be winners(losers), and contrarian means past winners(losers) become losers(winners) in the future. For momentum and contrarian directly disobey the Efficient Market Hypothesis, they have become the focus of financial study.In this paper, we (1)explore whether the momentum or contrarian strategies can earn significant profits in the stock market of China, (2)study the characteristics of the momentum and contrarian when considering the factor of scale, and (3)examine the relationship between momentum, contrarian and market states. Below are our main findings. Firstly, the short-term reversal is significant in China stock market, and the intermediate-term momentum is also significant. Secondly, the reversal effect in small-size firm stocks is more significant than the reversal effect in large-size firm stocks. Thirdly, reversal effect following UP market is more significant than reversal effect following DOWN market. We find out that investors' behavior biases of herd behavior, overreaction and disposition effect in China stock market and the stock price manipulation behavior of the banker can provide a satisfactory explanation to these result..