Article1992

The Contrarian Investment Strategy does not Work in Canadian Markets

80 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Corporate Finance and Governance Financial Analysis and Corporate Governance

Abstract

This paper tests the overreaction hypothesis using monthly data for stocks listed on the Toronto Stock Exchange over the 1950–1988 period. Unlike De Bondt and Thaler (1985), (1987), it finds statistically significant continuation behavior for the next one (and two) year(s) for winners and losers, and insignificant reversal behavior for winners and losers over longer formation/test periods of up to ten years. While the systematic risks of the winners decrease significantly over all test periods, the systematic risks of the losers increase significantly for only the 12-month formation/test periods (unlike Chan (1988)). The only significant change in variance from the formation to test periods occurs for the losers for the 12-month formation/test periods. The findings are robust for January versus non-January and size-based portfolios (unlike Zarowin (1989), (1990)). The findings are robust for various performance measures (specifically, market-adjusted CAR, and the Jensen (1968) and Sharpe (1966) portfolio performance measures).

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References

1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1985Does the Stock Market Overreact?1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964 1977Estimating betas from nonsynchronous data 1987Further Evidence On Investor Overreaction and Stock Market Seasonality 1985Persuasive evidence of market inefficiency 1987Mean Reversion in Stock Prices: Evidence and Implications 1990Fads, Martingales, and Market Efficiency

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1997The Cross Section of Common Stock Returns: A Review of the Evidence and Some New Findings 1997Long-term over-reaction in the UK stock market and size adjustments 2003Short-Term Overreaction in the Hong Kong Stock Market: Can a Contrarian Trading Strategy Beat the Market?1994On the computation of returns in tests of the stock market overreaction hypothesis 2000Overreaction in the Australian equity market: 1974–1997 2003

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