Momentum Trading, Mean Reversal and Overreaction in Chinese Stock Market *

While the vast majority of the literature reports momentum profitability to be overwhelming in the U.S. market and widespread in other countries, this paper finds that the pure momentum strategy in general does not yield excess profitability in the Chinese stock markets. We find instead strong mean reversion. A pure contrarian investment strategy produces positive excess returns and in general outperforms the pure momentum strategy. Momentum interacts with mean reversion. A strategy based on the rolling-regression parameter estimates of the model combining mean reversion and momentum generates positive excess returns in all cases, most of which statistically significant. The combined strategy outperforms both pure momentum and pure contrarian strategies. The strategy loads positively on the market risk factor, but the beta risk explains only a relatively small part of the excess return. Nor is transactions cost a dominant factor in explaining the excess profitability