The strategy trades Shanghai and Shenzhen stocks, longing low-return deciles and shorting high-return ones at 10:15 a.m., excluding extreme movers, holding positions until market close.
ASSET CLASS: stocks | REGION: China | FREQUENCY:
Intraday | MARKET: equities | KEYWORD: Reversal
I. STRATEGY IN A NUTSHELL
Trade Shanghai and Shenzhen stocks daily by buying the lowest-return decile and shorting the highest between 10:00–10:15 a.m., excluding stocks with >5% moves or no trades. Portfolios are value-weighted and held until market close, capturing short-term intraday reversals.
II. ECONOMIC RATIONALE
In China’s retail-driven market, investors anchor to the previous day’s close and irrationally trade against early price moves, causing intraday reversals. This behavioral bias—not liquidity—drives predictable short-term return patterns that fade over subsequent days.
III. SOURCE PAPER
What Drives Intraday Reversal? Illiquidity or Liquidity Oversupply? [Click to Open PDF]
Junqing Kang, Sun Yat-sen University (SYSU) – Lingnan (University) College; Shen Lin, Tianjin University – College of Management and Economics; Xiong Xiong, PBCSF, Tsinghua University – College of Management and Economics and China Center for Social Computing and Analytics
<Abstract>
Previous studies of the U.S. market regard short-term reversal as compensation for liquidity provision. However, we find that intraday reversal has no significant dependence on stock liquidity in the Chinese market. Hence, based on a stylized framework, we propose an alternative explanation: irrational uninformed liquidity providers, who underestimate the information component in the equilibrium price due to physiological anchoring, trade against previous price movement, which generates an opposing price pressure. The empirical results confirm this explanation of liquidity oversupply (from irrational uninformed liquidity providers). The negative correlation between previous intraday returns and future returns in the Chinese market is reversed once we extend the holding period. This indicates that reversal is a pricing error due to excessive liquidity provision from uninformed retail traders instead of a price correction from a temporary price concession due to a lack of liquidity.
IV. BACKTEST PERFORMANCE
| Annualised Return | 126.34% |
| Volatility | 12.02% |
| Beta | N/A |
| Sharpe Ratio | 10.51 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
