Short-term contrarian profits and the disposition effect

This article investigates the role of the disposition effect - the tendency of investors to sell stocks with paper gains early but hold stocks with paper losses for longer - in driving stock price overreaction as well as short-term contrarian profits. Taking the case of the Chinese stock market, we obtain firm-level data from the Taiwan Economic Journal database and consider the A-shares listed on the Shanghai and Shenzhen stock exchanges. Using a rolling portfolio approach, we examine three contrarian strategies. We provide theoretical evidence to argue that the disposition effect could be the major driving force of short-term contrarian profits, and provide empirical evidence from the Chinese stock market to support our argument. Our findings could be of considerable interest to researchers and practitioners interested in the Chinese stock market.