Presence and Sources of Contrarian and Momentum Profits in Bangladesh Stock Market Returns

Abstract

Purpose –Two most well-known return regularities are contrarian and momentum profits. This paper, using weekly data for the period 2002 through 2013, investigates the presence of both contrarian and momentum profits and their sources in the Bangladeshi stock market.Design/methodology/approach – The paper follows the methodology of Lo and MacKinlay (1990) to form portfolios with a weighted relative strength scheme. Methodology of Jegadeesh and Titman (1995) is used to decompose the contrarian/momentum profits into three elements: compensation for cross-sectional risk, lead-lag effect in time series with respect to the common factor, and time series pattern of stock returns. Robustness of results is checked by considering market risk factors.Findings – Results provide the evidence of significant contrarian profits for the holding period of one through eight weeks. There is stronger presence of contrarian profits during 2002-08. Time series pattern is found to be the main source of contrarian profits, suggesting that idiosyncratic (firm-specific) information is the main contributor to contrarian profits. Interestingly, the influence of idiosyncratic information on such profits has gradually decreased since 2008. Contrarian profits are robust to market sentiment and other systematic risk factors.Originality/value – This is the first detailed study on the presence of contrarian and momentum profits and their sources in the Bangladesh stock market. More specifically, no previous study has focused on sources of such profits, although it is an important issue as far as market efficiency is concerned.