APPLICABILITY OF CONTRARIAN INVESTMENT STRATEGIES IN SMALL CAPITALIZATION MARKETS: EVIDENCE FROM NASDAQ OMX VILNIUS

Arvydas Paškevičius,Rūta Mickevičiūtė

doi:10.15388/ekon.2011.0.953

Abstract

This study reviews previous research on the contrarian investment strategy as first analyzed by De Bondt and Thaler (1985), and aims at deepening and complementing the existing research on the subject. The paper analyses the results of applying the strategy to NASDAQ OMX Vilnius stocks over the period 2003–2010, dividing the testing into two groups: prior to the economic crisis and the crisis periods, based on the movement of the OMXV index. The method uses holding period returns in evaluating the standard contrarian investment strategy. The paper explains the methodology in detail and presents the findings which show no considerable holding period returns from the strategy in NASDAQ OMX Vilnius during the decline period; however, contrarian strategy seems to be a better option than a standard market index based portfolio during the periods of rapid growth when stocks are overrated.

Highlights

Previous research on contrarian investment The contrarian investment strategy has been tested in multiple stock markets across the world
The profitability of contrarian investment strategy was tested in the Lithuanian stock market during two periods: the pre-crisis period and the crisis period, as no considerable signs of stock market recovery were yet evident in the country
The aim of this study was to assess whether contrarian strategies would provide excessive returns during the economic growth and decline periods in the NASDAQ OMX Vilnius

Summary

Introduction

Previous research on contrarian investment The contrarian investment strategy has been tested in multiple stock markets across the world. Studies conducted in large capitalization and well developed markets have proved that contrarian strategies produce superior returns. Mun, Vasconcellos and Kish (1999) have found that for both French and German stock markets, short-term contrarian portfolios work best. De Bondt and Thaler report contrarian profits in the US markets in 1985, which are up to 25%. The strategy seems to be profitable in other large stock exchanges, such as Japan (Rosita, Chang, McLeavey, Ghon Rhee, 1995); this is the case for four European countries: France, Germany, the UK and the Netherlands (Brouwer, van der Put, Veld, 1997). A recent study carried out in Bombay Stock Exchange (Locke, Gupta, 2009) confirmed superior returns from the contrarian investment strategy as well

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