Contrarian Profits Research Articles

Short-term contrarian in the carbon emission market

We consider the short-term contrarian effects in daily data from carbon emission markets. Technical analysis is conducted with three contrarian trading rules on four carbon emission markets of China. Various individual and joint test statistics are developed for testing the contrarian profits from individual trading path as well as a group of trading paths. Empirical evidence shows that the contrarian profits are statistically and economically significant across the technical rules. Particularly, the contrarian moving average group trading generates average returns of 3.8 to 13.8 % per month across the different carbon markets during the period of 2013–2023 and the corresponding Sharpe ratios range from 0.9 to 2.01, while the Sharpe ratios from the buy-and-hold strategy are all below 0.12. Further tests support that the contrarian profits are not eliminated by transaction costs, and not dominated by extreme returns. We also emphasize on the explanations of the contrarian profit. Among the considered variables, the market volatility is the most significant explanatory variable for contrarian profits across four markets, whereas the market illiquidity and non-trading breaks are also significant in certain markets. The finding supports the explanation of the behavioural bias of overreaction for the short-term contrarian effect. Other explanations, including short-selling constraint, clearing stress, price limits, government interventions, etc. are also discussed in the paper.

Evolution of short-term contrarian profits

PurposeThe purpose of this paper is to study the US stock market and try to explain why short-term contrarian profits have largely disappeared in the past two decades.Design/methodology/approachIn this work, the authors decompose the short-term contrarian profits into cross-sectional variations, firm-level overreactions and lead-lag effects to study the changes in their shares. Then, the authors study the behavior of the subgroups in the winner and loser subportfolios of contrarian investment strategies.FindingsThe authors find that short-term contrarian profits have largely vanished since 2000. Changes in the shares of the three components of contrarian profits, which are cross-sectional variations, firm-level overreactions and lead-lag effects, are not the main reason for the disappearance of contrarian profits in the past two decades. Instead, the disappearance of short-term contrarian profits is primarily due to the heterogeneous evolution of subgroups in the portfolio, which leads to a decrease in the overall level of overreactions that drive the contrarian profit.Originality/valueThe work explains the disappearance of short-term contrarian profits in the US stock market.

Contrarian Profits and the Overreaction Hypothesis: The Case of the Athens Stock Exchange

This paper investigates the existence of contrarian profits and their sources for the Athens Stock Exchange (ASE). The empirical analysis decomposes contrarian profits to sources due to common factor reactions, overreaction to firm-specific information, and profits not related to the previous two terms, as suggested by Jegadeesh and Titman (1995). Furthermore, in view of recent evidence that common stock returns are related to firm characteristics such as size and book-to-market equity, the paper decomposes contrarian profits to sources due to factors derived from the Fama and French (1993, 1996) three-factor model. For the empirical testing, size-sorted sub-samples that are rebalanced annually are employed, and in addition, adjustments for thin and infrequent trading are made to the data. The results indicate that serial correlation is present in equity returns and that it leads to significant short-run contrarian profits that persist even after we adjust for market frictions. Consistent with findings for the US market, contrarian profits decline as one moves from small stocks to large stocks, but only when market frictions are considered. Furthermore, the contribution to contrarian profits due to the overreaction to the firm-specific component appears larger than the underreaction to the common factors.

Contrarian Profits in Thailand Sustainability Investment-Listed versus in Stock Exchange of Thailand-Listed Companies

In contrarian trading, investors buy and sell loser stocks (lowest average historical prices) and winner stocks (highest average historical prices), respectively. This study examines whether (a) Thailand Sustainability Investment-listed companies outperform Stock Exchange of Thailand (SET)-listed companies (from 1 January 2016 to 31 December 2019) in contrarian profits, (b) the five-factor model outperforms their 1993 three-factor model in explaining contrarian profits, and (c) risk drives the earnings of contrarians. Companies were divided into portfolios of winners and losers based on the average of the daily historical prices held in various eras. The SET-listed companies perform better in generating profits. The root mean squared error and mean absolute error—measurements of model accuracy—report that the error from the three-factor model is smaller than the one from the five-factor model. Thus, the three-factor model is applied to estimate the risk-adjusted return. Zero contrarian profits after risk adjustment confirms that they are risk-driven.

Adaptive Market Hypothesis and Time-varying Contrarian Effect: Evidence From Emerging Stock Markets of South Asia

This study contributes to the growing debate on the relation between varying stock market conditions and the profitability of stock market anomalies. We investigate the effect of changed market conditions on time-varying contrarian profitability in order to examine the presence of the Adaptive Market Hypothesis (AMH) in South Asian emerging stock markets. The empirical findings reveal that a strong contrarian effect holds in all the emerging markets. We also find the stock return opportunities vary over time based on contrarian portfolios. We show that contrarian returns strengthen during the down state of market, higher volatility and crises periods, particularly during the Asian financial crisis. Interestingly, the market state instead of market volatility is the primary predictor of contrarian payoffs, which contradicts the findings of developed markets. We argue that the linkage arises from structural and psychological differences in emerging markets that produce unique intuitions regarding stock market anomalies returns. The overall findings on the time-varying contrarian returns in this study provide partial support to AMH. Another significant outcome of this study implies that investors in South Asian emerging markets, like investors in the developed markets, could not adapt to evolving market conditions. Therefore, contrarian profits often exist, and persistent weak-form market inefficiencies prevail in these markets.

Market overreaction, firm-specific information and macroeconomic variables in US and Chinese markets during COVID-19

PurposeThis study examines the impact of firm-specific information and macroeconomic variables on market overreaction of US and Chinese winner and loser portfolio before and during COVID-19.Design/methodology/approachThe firm-specific information includes firm size, volume, volatility, return of asset (ROA), return of equity (ROE), earning per share (EPS) and quick ratio while the macroeconomic variables are export rate, import rate, real GDP, nominal GDP, FDI, IPI and unemployment rate. Besides, one-third of the top performance stocks are categorized as winner portfolio while one-third of lowest performance stocks are categorized as loser portfolio. This study uses AECR to indicate stock return and measure market overreaction. GAECR is used to determine contrarian profit. The data range of pre-COVID-19 is from 1-Jan-2015 to 31-Dec-2019 while the period of COVID-19 is from 1-Jan-2020 to 31-Dec-2020.FindingsIn pre-COVID-19, firm-specific information (volatility, ROA, ROE and EPS) and macroeconomic variables are found to be correlated to stock return in US and Chinese portfolios except Chinese winner portfolio. Nonetheless, the impact of firm-specific information has vanished and macroeconomic variables are significant to stock return in COVID-19. It shows that investors rely on the economic indicators to trade in turbulent period due to emergence of COVID-19 as a disruption in market. Furthermore, US and Chinese portfolios are overreacted during COVID-19. Chinese loser portfolio has higher tendency of overreaction than US loser portfolio while US winner portfolio has higher tendency of overreaction than Chinese winner portfolio.Originality/valueThe results of this study assists academician, practitioners and investors on understanding and create awareness to the existence of market overreaction and the determinants that can cause the phenomenon.

Contrarian profits and representativeness heuristic in the MENA stock markets

This paper aims to test two competing explanations for the contrarian profits in ten MENA stock markets: the risk-based rational explanation and the representativeness-based behavioral explanation. We found that the CAPM, the three-factor model of Fama and French (1996) and the five-factor model of Fama and French (2015) fail to capture the contrarian profits in most MENA stock markets, which indicates that these profits cannot be explained by the risk. Moreover, the hypothesis that the representativeness heuristic leads to investors’ overreaction does not hold for all the stock markets. In fact, only Egypt, Jordan, Saudi Arabia, and Kuwait tend to overreact to a series of similar earnings surprises and the magnitude of the market overreaction increases with the length of such series. To explicitly examine whether representativeness explains the contrarian profits, we extended the five-factor model to include a factor based on similar past earnings surprises. Inconsistent with the representativeness heuristic, we found that the contrarian profits in most MENA markets are not captured by a zero-investment portfolio that is short on the portfolio with a series of positive earnings surprises and long on the portfolio with a series of negative earnings surprises. However, with a long series of earnings surprises the contrarian strategy in Kuwait and Oman seems to lose its profitability. These findings indicate that the effect of the representativeness heuristic may depend on the persistence of past performance.

Short-term contrarian profits and the disposition effect

This article investigates the role of the disposition effect — the tendency of investors to sell stocks with paper gains early but hold stocks with paper losses for longer — in driving stock price overreaction as well as short-term contrarian profits. Taking the case of the Chinese stock market, we obtain firm-level data from the Taiwan Economic Journal database and consider the A-shares listed on the Shanghai and Shenzhen stock exchanges. Using a rolling portfolio approach, we examine three contrarian strategies. We provide theoretical evidence to argue that the disposition effect could be the major driving force of short-term contrarian profits, and provide empirical evidence from the Chinese stock market to support our argument. Our findings could be of considerable interest to researchers and practitioners interested in the Chinese stock market.

The stability and downside risk to contrarian profits: Evidence from the S&P 500

AbstractA large literature now reports the evidence for the profitability of contrarian trading strategies. We investigate the stability of such contrarian trading strategies and their ability to generate large, potentially ruinous, losses for their users. Specifically, we ask, are the annual profits earned by contrarian strategies sufficiently stable and loss‐free to keep their adherents in the game and capable of reaping returns to such long‐run trading strategies? We present tests with more statistical power than hitherto, reflecting practical aspects of the operation of contrarian strategies. Specifically, the strategies are implemented only for years in which the mean return of stocks in the buy portfolio exceeds that of the sell portfolio; in addition, for each strategy, we calculate the Calmar ratio as a measure of downside risk. Using the constituents of the S&P 500 index for the years 1990–2017 inclusive, we examine a variety of simple, ratio‐based strategies and more complicated strategies based on formal valuation models. Overall, our evaluation makes us sceptical about the reliability of contrarian strategies as currently formulated. But of those strategies available, those based on discounted cash flow seem most likely to be profitable.

The profitability of trading strategies based on historical prices and risk: evidence from Thailand

Historical trends in share prices can be used in trading strategies to generate profits. Two such strategies are the momentum and contrarian trading strategies. The contrarian trading strategy tends to generate profits on the Stock Exchange of Thailand (SET; Pokavattana et al., 2019). The existence of contrarian profits, especially for cyclical stocks, has been confirmed for the period 1st January 2016 to 31st December 2019. It is generally suggested that contrarian investors form portfolios based on average prices over the past 60 days and hold the stock for one day. The longer the holding period, the smaller the contrarian profits. Once Fama and French's (2015) five-factor model is used to control for risk, the contrarian profits disappear. Accordingly, contrarian profits are driven by risk. These findings provide SET investors with a refined strategy and also yield implications for the stock markets in the close-knit ASEAN network.

White lie effects of information asymmetry on stock momentum

This paper aims to explore the relationship between information asymmetry and stock momentum. Using winner and loser approach, we find that winners with exaggerated forecast of earnings per share are more likely to have contrarian profits in subsequent holding periods. On the contrary, winners with low or middle-low information asymmetry tend to continue their good returns in future holding periods. In addition, the losers with middle information asymmetry achieve the highest contrarian profits, which may be called “white lie effects.”

Contrarian profits of the firm-specific component on stock returns

A weekly contrarian strategy based on residual stock returns provides larger, more significant, and steadier profits than conventional contrarian strategies, which use total returns. We decompose residual return-based contrarian profits by modifying the decomposition methodology in Lo and MacKinlay (1990). This decomposition reveals that the residual return-based contrarian profits are attributed to negative autocovariances in individual residual returns, rather than positive cross-serial covariances across residual returns. We further decompose Lo and MacKinlay's decomposition, and reveal that winners are strongly negatively autocorrelated. In conclusion, investors' overreactions to good firm-specific news are a primary source of residual contrarian profits.

Adaptive market hypothesis and momentum effect: Evidence from Dhaka Stock Exchange

This paper examines time-varying behavior of momentum and contrarian profits to identify the existence of adaptive market hypothesis (AMH), and whether AMH can provide justification for the presenc...

Presence and Sources of Contrarian Profits in the Bangladesh Stock Market

This article, using weekly data for the period 2002 through 2013, investigates the presence of both contrarian and momentum profits and their sources in the Bangladesh stock market. It follows the methodology of Lo and MacKinlay ( Review of Financial Studies, 1990, 3(2), 175–205) to form portfolios with a weighted relative strength scheme (WRSS). The methodology of Jegadeesh and Titman ( Review of Financial Studies, 1995, 8(4), 973–993) 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 the time-series pattern of stock returns. Results provide the evidence of significant contrarian profits for the holding period of one through eight weeks. There is a stronger presence of contrarian profits during 2002–2008 sub-period. The 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.

Short-term contrarian and sentiment by traders’ types on futures markets

PurposeThe purpose of this paper is to investigate whether the interaction between sentiments and past prices can lead to higher abnormal profit in futures markets. Such examinations allow the authors to relate the paper to the debate that focuses on examining the behavior of different types of traders in futures market, and who among these traders destabilize the markets.Design/methodology/approachFirst, the authors develop new dynamic strategies in US futures market that combine sentiment by type of traders based on trader position provided by the Disaggregated Commitments of Traders with short-term contrarian signals. Next, the authors adjust the abnormal profits to the CAPM model and Miffre and Rallis’s (2007) model. Finally, the authors use the Du (2012) decomposition methodology.FindingsThe main findings are that the abnormal profit is more pronounced when the authors combine past returns with lagged high producer/merchant/processor/user or low managed money sentiment. The results from swap dealer or other reportable groups show that there is no pervasive directional relation between their sentiment and contrarian profit. A further investigation of the sources of abnormal profits demonstrates that these profits survive even after the adjustment of obtained return to risk. Instead, these profits are mainly due to the overreaction to the news by irrational traders.Originality/valueBased on behavioral finance theories, the authors conclude that producer, merchant, processor and user behave like irrational traders, while managed money traders behave like rational ones. Given that current regulatory proposes the limitation of speculation, the policy implications of these results are important. Therefore, these findings suggest that policy distinctions on trading motives may be more challenging to construct than ever.

Presence of Contrarian Profits in the Jordan Stock Market

Since the late 1980’s academicians have confirmed the presence of various forms of return regularities in stock returns. Two most well-known return regularities are contrarian and momentum profits. This paper – using monthly data for the period 2000 through 2016 – examines the presence of both contrarian profits and their sources in the Jordan stock market. The paper uses the methodology of Lo and MacKinlay (1990) and Jegadeesh and Titman (1995) to examine the presence of contrarian returns as well as the sources of such returns. Unlike other emerging markets where strong contrarian profits are found, Jordan market shows relatively weaker presence of contrarian profits. Moreover, time-series pattern – which is related to specific factors, is considered the main source of contrarian profits.

Contrarian and Momentum Investment Strategies in Pakistan Stock Exchange

This study examines several aspects of the momentum strategies, such as profitability, risk-based explanation, and decomposition of the momentum profits. For this purpose, we use weekly and monthly data of 581 firms listed at the Pakistan Stock Exchange (PSX) for the period 2004-2014. We found the presence of momentum profits over short and long-horizons, while majority of the contrarian profits were observed only in the presence of penny stocks that have share prices of PKR 10 or less. As a robustness check, we computed returns through the weighted relative strength scheme (WRSS) procedure and average cumulative abnormal returns (ACARs). Interestingly, the results reported through WRSS have shown a similar pattern to that obtained through average cumulative abnormal returns (ACARs). Further, to know which factor contributes more to momentum and contrarian profits, we used the model proposed by Lo and MacKinlay (1990). Our findings show that the overreaction effect is the largest contributing factor of contrarian profits in PSX, while cross-sectional risk is the second largest factor and negatively affects the contrarian profits. Moreover, the lead-lag effect contributes positively to the contrarian profits. Similarly, the largest contributing factor for momentum profits is the underreaction effect, whereas cross-sectional risk is the second largest factor that positively affects momentum profits. Unlike contrarian profits, lead-lag effect reduces the momentum profits in the PSX.

Size, Seasonality, Market States and Contrarian Profits

ABSTRACT The study investigates the profitability of contrarian and momentum strategies for short, intermediate and long investment horizons in the Malaysian stock market from 1990-2016. Unlike developed markets, the findings reveal that momentum strategies do not generate profits in Malaysia. Rather, contrarian strategies realise significant returns over short, intermediate and long investment horizons. Contrarian profits are most pronounced among medium- and small-capitalisation stocks. Moreover, the previously documented February/Chinese New Year effect is evident in contrarian profits. Further, market states are important determinants of contrarian profits. Specifically, contrarian returns are greater following market downturns than market upturns. The findings provide important implications for investors who are considering momentum and contrarian strategies as potential investments. Keywords: Contrarian strategies; momentum strategies; firm size; monthly seasonality; market states ABSTRAK Kajian ini mengkaji keuntungan strategi momentum dan kontrarian dalam tempoh pelaburan jangka masa pendek, sederhana dan panjang di pasaran saham Malaysia dari tahun 1990-2016. Tidak seperti negara-negara maju, hasil kajian menunjukkan bahawa strategi momentum tidak menjana keuntungan di Malaysia. Sebaliknya, strategi kontrarian menghasilkan keuntungan yang signifikan dalam tempoh pelaburan jangka masa pendek, sederhana dan panjang. Keuntungan strategi kontrarian adalah paling tinggi di kalangan saham-saham bersaiz kecil dan sederhana. Selain itu, keuntungan kontrarian yang tinggi diperoleh pada bulan Februari/Tahun Baru Cina. Tambahan pula, keadaan pasaran merupakan faktor utama keuntungan kontrarian. Secara khususnya, pulangan kontrarian adalah lebih tinggi berikutan kemerosotan pasaran berbanding dengan pertumbuhan pasaran. Hasil kajian ini memberikan implikasi yang penting kepada pelabur yang sedang mempertimbangkan strategi kontrarian dan momentum sebagai pilihan pelaburan yang berpotensi. Kata kunci: Strategi kontrarian; strategi momentum; saiz firma; seasonaliti bulanan; keadaan pasaran

Return predictability and contrarian profits of international index futures

Using futures markets, we examine the lead‐lag relationships among 11 industrialized countries. Lagged monthly returns for several countries have return predictability comparable to those in the United States for the 1988–2016 period. The international futures markets are more correlated in market downturns, while the lead‐lag relationships are more significant in market upturns. Consistent with these asymmetric relationships, a contrarian strategy (in particular, by buying the losers) offers significant profits in an up market but not in a down market. The contrarian profits are not captured by a factor model using global equity factors and momentum profits.

Contrarian and Momentum Investment Strategies in Pakistan Stock Exchange

In this study, we examine several aspects of the momentum strategies such as profitability, risk-based explanation, and decomposition of the momentum profits. For this purpose, we use weekly and monthly data of 581 firms listed at the Pakistan Stock Exchange (PSX) for the period 2004-2014. We found the presence of momentum profits over short- and long-horizons, while majority of the contrarian profits were observed only in the presence of penny stocks that have share prices of PKR 10 or less. As a robustness check, we computed returns through weighted relative strength scheme and average cumulative abnormal returns. Interestingly, both the methods have shown a similar pattern in returns. Further, to know which factor contributes more to momentum and contrarian profits, we used the model proposed by Lo and MacKinlay (1990). Our findings show that the overreaction effect is the largest contributing factor of contrarian profits in PSX, while cross-sectional risk is the second largest factor. Moreover, the lead-lag effect contributes positively to the contrarian profits. Similarly, the largest contributing factor for momentum profits is the underreaction effect whereas cross-sectional risk is the second largest factor that positively affects momentum profits. Unlike contrarian profits, lead-lag effect reduces the momentum profits in the PSX.