Comomentum in China: Inferring arbitrage activity from return correlation

Abstract

This paper investigates whether arbitrageurs can have a destabilizing effect on the Chinese stock market. We use comomentum defined as high-frequency abnormal return correlation among stocks to measure arbitrage activity. In contrast to the findings of Lou and Polk (2022), we find that the returns on momentum stocks exhibit long-term stabilization in China, regardless of whether comomentum is higher or lower. The results suggest that fluctuations in arbitrage activity do not serve as predictive indicators for changes in long-term momentum returns in the Chinese stock market. These results further emphasize the missing effect of the momentum strategy in the Chinese market.