An Anatomy of Trading Strategies: Evidence from China

Abstract

Using a pooled cross-sectional time series approach, we evaluate profits of momentum strategies and identify the sources of profits in China's stock market. Momentum strategies generate significant and negative returns in the A-share market on investment horizons at one month and at and above nine months. In the B-share market, momentum strategies yield significant and negative returns at and above twelve months. Decomposition analysis finds that the negative returns are predominately attributed to the time series profitability of stock returns. Although momentum strategies generate significant and positive returns over the period after China opened its once foreign-restricted B-share market to domestic individual investors, the relative importance of the time series predictability and the cross-sectional variation does not change.