Hot and Cold Strategies: Australian Evidence

Abstract

The main purpose of this paper is to explore a high-frequency tactical asset allocation strategy. In particular, we investigate the profitability of momentum trading and contrarian investment strategies for equities listed on the Australian Stock Exchange (ASX). In these two strategies we take into consideration the short-selling restrictions imposed by the ASX on the stocks used. Within our sample portfolios we look at the relationship between stock returns and past trading volume for these equities. This research also investigates the seasonal aspects of contrarian portfolios and observes weekly, monthly and yearly effects. We report significant contrarian profits for the period investigated (from 2001 to 2006) and show that contrarian profit is a persistent feature for the strategies examined. We also document that contrarian portfolios earn returns as high as 6.54% per day for portfolios with no short-selling restrictions, and 4.71% in the restricted model. The results also support the view that volume traded affects stock returns, and show that market imperfections such as short-selling restrictions affect investors' returns.