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Contrarian investment strategies: International evidence

Author:
Harmen Bos  


Issue Date:
2011


Abstract(summary):

I find no significant evidence for the overreaction effect in its standard design in several EU countries for the period 2000-2009. Most of the trends over the holding period and signs of the returns are in accordance with the theory, but the values and standard errors of the ten portfolios do not convincingly show an overreaction effect. However, when altering the size of the portfolios there seems to be a relation between the size of the market that the overreaction effect is tested on and the optimal size of the loser and winner portfolios used to form an arbitrage portfolio. The returns to arbitrage portfolios on the smaller markets seem to benefit from taking smaller portfolio sizes whereas larger portfolios render a higher return when markets are larger. Furthermore, when switching the positions on the loser (long) and winner (short) portfolios in evaluation periods when there is a deviation from the usual distribution of the market values for the loser portfolio, winner portfolio and market as a whole, an even greater return on the arbitrage portfolio is generated. The main idea of a reversal still seems to be present, but the significance as found in the papers of De Bondt and Thaler (1985, 1987) and Baytas and Cakici (1999) is not obtained. Using findings of Zarowin (1990) and two hypotheses of De Bondt and Thaler (1985), however, a significant rate of return on the "contrarian" arbitrage portfolio can still be realized. It is unclear whether something has changed fundamentally in the market, or that arbitrageurs have taken advantage of the opportunity.


Page:
18


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