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The Robustness of Abnormal Returns from the Earnings Yield Contrarian Investment Strategy

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  • Badrinath, S G
  • Kini, Omesh

Abstract

We examine the sensitivity of the abnormal profitability of the earnings' yield (E/P)-based contrarian investment strategy to the following two risk measurement issues: (a) return-measurement interval over which systematic risk is estimated and (b) time variation in systematic risk. We conduct our analysis using the capital asset pricing model to parameterize risk. We find that the estimates of systematic risk of E/P-ranked portfolios are not sensitive to the return-measurement interval. Consequently the abnormal profits to the E/P-based contrarian investment strategy observed in prior studies are not artifacts of the return-measurement interval. Furthermore, although both the raw and abnormal returns to E/P-ranked portfolios exhibit mean reversion, time variation in systematic risk ensuing from this mean-reverting behavior does not substantially affect abnormal profits to E/P-ranked portfolios.

Suggested Citation

  • Badrinath, S G & Kini, Omesh, 2001. "The Robustness of Abnormal Returns from the Earnings Yield Contrarian Investment Strategy," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(3), pages 385-401, Fall.
  • Handle: RePEc:bla:jfnres:v:24:y:2001:i:3:p:385-401
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. Handa, Puneet & Kothari, S. P. & Wasley, Charles, 1989. "The relation between the return interval and betas : Implications for the size effect," Journal of Financial Economics, Elsevier, vol. 23(1), pages 79-100, June.
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    5. Chopra, Navin & Lakonishok, Josef & Ritter, Jay R., 1992. "Measuring abnormal performance : Do stocks overreact?," Journal of Financial Economics, Elsevier, vol. 31(2), pages 235-268, April.
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    7. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
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    11. Jaffe, Jeffrey & Keim, Donald B & Westerfield, Randolph, 1989. " Earnings Yields, Market Values, and Stock Returns," Journal of Finance, American Finance Association, vol. 44(1), pages 135-148, March.
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    Cited by:

    1. Kwame Addae-Dapaah & James Webb & Kim Ho & Yan Tan, 2010. "Industrial Real Estate Investment: Does the Contrarian Strategy Work?," The Journal of Real Estate Finance and Economics, Springer, vol. 41(2), pages 193-227, August.
    2. Dr. Maher Odeh Al-Shamaileh & Salim. M. Khanfar, 2014. "The Effect of the Financial Leverage on the Profitability in the Tourism Companies (Analytical Study- Tourism Sector- Jordan)," Business and Economic Research, Macrothink Institute, vol. 4(2), pages 251-264, December.

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