What Drives the Profitability of Reversals in South Asian Emerging Markets? A Multilevel Approach to Firm, Industry, and Macroeconomic Factors

The aim of this study is to examine whether macro-economic indicators, industry factors and firm-specific factors tend to predict returns to contrarian strategies. The sample of the study comprised of South Asian markets. The methodology uses portfolio formation, rebalancing, and predictive regressions including global risk factors. Findings show that firm-specific variables like trading volume and market value have strong predictive power for contrarian returns. Loser portfolios composed of stocks with the lowest trading volume and smallest market value deliver the largest contrarian returns consistently across sample periods. Industry-level analysis shows a persistent industry contrarian effect during the Asian and global financial crises. Industry momentum, however, became apparent after the global financial crisis and during the COVID-19 pandemic. Predictive regressions identify the industrial production index (IPI), balance of trade (BOT), and three-month interest rate (3M-INT) as significant macroeconomic predictors of loser returns and contrarian strategy payoffs. Results indicate that combining micro and macro information improves timing and selection of contrarian investments in South Asian emerging markets. These insights are relevant for investors and policymakers assessing return patterns and market stability.