China's Stock Market Momentum Effect Profitability

We took an empirical study on momentum effect in China stock market based on stocks listed on Shanghai and Shenzhen Stock Exchange. We find that, for stocks listed on Shanghai Stock Exchange, momentum strategy, which is buying past winners and selling past losers, can’t generate significant profits when the formation periods are one month, but this strategy can generate significant positive profits when the formation periods are 3 or 6 months. The momentum profits are highest when the formation periods are 6 months and the holding periods are 7 month, with highest profits of 0.89% per month. For stocks listed on Shenzhen Stock Exchange, things are different, returns of buying past winners and selling past losers have zero or negative value, so contrarian strategy, which is buying past losers and selling past winners may generate positive profits, contrarian strategy has the highest return of 1.72% per month when the holding periods are one month and formation periods are one month, however, most of the returns are not significant during the whole holding periods in Shenzhen Stock Exchange. We also calculate CAPM alpha and we find that the results are similar but the significance of the returns are increased when considering CAPM alpha.