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The contrarian investment strategy: additional evidence

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  • Johnathan Mun
  • Richard Kish
  • Geraldo Vasconcellos

Abstract

This paper tests the contrarian investment strategy, which predicts that stocks that consistently underperform (outperform) the market would in subsequent periods outperform (underperform) those stocks that have previously outperformed (underperformed) the market, using a revised nonparameteric estimator of excess returns and risk coefficients, specified in a time-varying risk multi-factor CAPM model. The conventional parametric approach is used as the control estimator for comparing the effectiveness of this nonparametric approach. Using bootstrap simulations, conventional CAPM estimates reveal that there exists a significant price reversal effect between the formation and test periods, as did the nonparametric estimates. However, one striking difference was that the nonparametric approach revealed more conservative but still significant estimates than did conventional parametric approaches. The multi-factor model reveals weaker results of price reversals and the results dissipate over time. Therefore, the contrarian strategy is only weakly supported and it is concluded that, ceteris paribus, the nonparametric approach yields significantly better estimates than do parametric approaches in estimating the parameters of both the single-factor and multi-factor CAPM.

Suggested Citation

  • Johnathan Mun & Richard Kish & Geraldo Vasconcellos, 2001. "The contrarian investment strategy: additional evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 11(6), pages 619-640.
  • Handle: RePEc:taf:apfiec:v:11:y:2001:i:6:p:619-640
    DOI: 10.1080/096031001753266911
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    References listed on IDEAS

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    1. Hatanaka, Michio, 1996. "Time-Series-Based Econometrics: Unit Roots and Co-integrations," OUP Catalogue, Oxford University Press, number 9780198773535.
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    Cited by:

    1. Georgi Nalbantov & Rob Bauer & Ida Sprinkhuizen-Kuyper, 2006. "Equity style timing using support vector regressions," Applied Financial Economics, Taylor & Francis Journals, vol. 16(15), pages 1095-1111.
    2. Walid Saleh, 2007. "Overreaction: the sensitivity of defining the duration of the formation period," Applied Financial Economics, Taylor & Francis Journals, vol. 17(1), pages 45-61.
    3. 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.

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