This paper investigates the time-varying risk-premium relation of the Chinesestock markets within the framework of cross-sectional momentum and contrarianeffects by adopting the Capital Asset Pricing Model and the French-Fama threefactor model. The evolving arbitrage opportunities are also studied byquantifying the performance of time-varying cross-sectional momentum andcontrarian effects in the Chinese stock markets. The relation between thecontrarian profitability and market condition factors that could characterizethe investment context is also investigated. The results reveal that therisk-premium relation varies over time, and the arbitrage opportunities basedon the contrarian portfolios wax and wane over time. The performance ofcontrarian portfolios are highly dependent on several market conditions. Theperiods with upward trend of market state, higher market volatility andliquidity, lower macroeconomics uncertainty are related to higher contrarianprofitability. These findings are consistent with the Adaptive MarketsHypothesis and have practical implications for market participants.
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