A note on momentum and contrarian strategies across price limit regimes: Evidence from China's A-share market

Abstract

This paper applies stochastic dominance with and without risk-free assets to examine the profi tability of momentum strategies in the wake of the regime transition after the implementation of price limits in China's A-share market. According to our evidence, winner portfolios stochastically dominate loser portfolios at the second-order stochastic dominance over the horizon of 6 to 12 months with price limits. In contrast, higher returns appear on loser portfolios that dominate the returns on winner portfolios without price limits. This evidence, which agrees with the delayed price discovery hypothesis, gives rise to a positive autocorrelation of stock returns and provides the rationale for the stock prices of winner portfolios that exhibit signifi cant price continuation phenomenon.

Keywords:

• Stochastic dominance
• Momentum strategies
• China's A-share market
• Price limits JEL classifi cation: C14
• G11
• G14