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Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964–2005

Author

Listed:
  • Emilios C. C Galariotis

    (Durham Business School - Durham University)

  • Phil Holmes

    (Durham Business School - Durham University)

  • Xiaodong S. Ma

    (WBS - Warwick Business School - University of Warwick [Coventry])

Abstract

We provide evidence relating to contrarian and momentum profits for the LSE, using 64 strategies for all 6531 stocks traded from 1964 to 2005. Thorough analysis demands controlling for key potential (contradictory) explanations of the strategies' profitability which span psychological characteristics (e.g. overreaction/underreaction), excess risk, seasonality, size, and microstructure induced biases. Results provide a measurement of the miscalculations which occur when ignoring survivorship and microstructure biases. Contrarian/momentum profits cannot be explained by seasonality, size, or a single factor risk model. However, the Fama–French three factor model rationalises all contrarian profits. Important differences are found when examining a truncated sample period demonstrating the need to recognise that financial markets can change markedly through time.

Suggested Citation

  • Emilios C. C Galariotis & Phil Holmes & Xiaodong S. Ma, 2008. "Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964–2005," Post-Print hal-01091120, HAL.
    • Handle: RePEc:hal:journl:hal-01091120
    DOI: 10.1016/j.mulfin.2007.01.003
    as

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