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When are Contrarian Profits Due to Stock Market Overreaction (Reprint 001)

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  • Andrew Lo
  • Craig A. Mackinlay

Abstract

If returns on some stocks systematically lead or lag those of others, a portfolio strat-egy that sells "winners" and buys "losers" can produce positive expected returns, even if no stock's returns are negatively autocorrelated as virtually all models of overre-action imply. Using a particular contrarian strategy, we reconcile the strong positive autocorrelation of weekly portfolio returns with the weak negative autocorrelation for individual stock returns. We show that the returns of large stocks lead those of smaller stocks, and present evidence against overreaction as the only source of contrarian prof-its.

Suggested Citation

  • Andrew Lo & Craig A. Mackinlay, "undated". "When are Contrarian Profits Due to Stock Market Overreaction (Reprint 001)," Rodney L. White Center for Financial Research Working Papers 04-89, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:04-89
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    Cited by:

    1. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Evidence on the contrarian trading in foreign exchange markets," Economic Modelling, Elsevier, vol. 26(6), pages 1420-1431, November.

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