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Profitability of Contrarian Strategies: Evidence from the Istanbul Stock Exchange

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  • RECEP BILDIK
  • GÜZHAN GÜLAY

Abstract

This study examines the momentum and contrarian effects on stock returns in one of the leading emerging markets, which has a unique market structure, with record‐high inflation, high volatility, high turnover, low correlation of returns with other exchanges and myopic investors: the Istanbul Stock Exchange (ISE). It also investigates the weak‐form efficiency of the stock market by examining the profitability of a number of contrarian strategies based on past returns, size, price, book‐to‐market and earnings‐to‐price ratios of stocks in various lengths of formation and holding periods. Our findings show that a self‐financing trading strategy, buying past loser stocks and selling past winner stocks generate significant abnormal returns (approximately 15% annually) in ISE. However, these large contrarian profits are for bearing the extra risk of loser stocks similar to the US results. We also find significant price, size, and B/M effects in stock returns. Finally, our results show the continous profitability of contrarian strategies both in very short (starting from 1 month) and in long holding periods (up to 36 months), which appears to be related to country‐specific factors.

Suggested Citation

  • Recep Bildik & Güzhan Gülay, 2007. "Profitability of Contrarian Strategies: Evidence from the Istanbul Stock Exchange," International Review of Finance, International Review of Finance Ltd., vol. 7(1‐2), pages 61-87, March.
    • Handle: RePEc:bla:irvfin:v:7:y:2007:i:1-2:p:61-87
    DOI: 10.1111/j.1468-2443.2007.00068.x
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    2. Tekçe, Bülent & Yılmaz, Neslihan & Bildik, Recep, 2016. "What factors affect behavioral biases? Evidence from Turkish individual stock investors," Research in International Business and Finance, Elsevier, vol. 37(C), pages 515-526.
    3. Atilgan, Yigit & Demirtas, K. Ozgur & Erdogan, Alper, 2016. "Share issuance and equity returns in Borsa Istanbul," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 320-333.
    4. Cahit Adaoglu & Meziane Lasfer, 2011. "Why Do Companies Pay Stock Dividends? The Case of Bonus Distributions in an Inflationary Environment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 38(5-6), pages 601-627, June.
    5. Atakan Yalçın & Nuri Ersşahin, 2011. "Does the Conditional CAPM Work? Evidence from the Istanbul Stock Exchange," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(4), pages 28-48, July.
    6. Białkowski, Jędrzej & Bohl, Martin T. & Kaufmann, Philipp & Wisniewski, Tomasz P., 2013. "Do mutual fund managers exploit the Ramadan anomaly? Evidence from Turkey," Emerging Markets Review, Elsevier, vol. 15(C), pages 211-232.

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