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Behavior Of Momentum Following And Contrarian Market Timers


  • Alok Kumar

    () (Mendoza College of Business)


I analyze the behavior of a group of investment newsletters that provide explicit recommendations about the fractions of investment holding that should be allocated to risky and riskless asset classes. I find that the group of newsletters exhibit few types of simple behaviors and a majority of them can be classified as either momentum follower or contrarian. My analysis also shows that portfolios recommended by both momentum following and contrarian newsletters are capable of outperforming a fully invested benchmark portfolio. The newsletter recommended portfolios have positive Sharpe ratios, lower beta with respect to the market and a positive Jensen's alpha. Overall, these results indicate that by using simple trading strategies and proper timing, some newsletters are able to exhibit superior performance. The results also provide empirical support for models that posit feedback based investor behavior and provide a useful parametrization for researchers modeling investor behavior.

Suggested Citation

  • Alok Kumar, 1999. "Behavior Of Momentum Following And Contrarian Market Timers," Yale School of Management Working Papers ysm113, Yale School of Management.
  • Handle: RePEc:ysm:somwrk:ysm113

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    References listed on IDEAS

    1. Singh, Rajdeep, 1998. "Takeover Bidding with Toeholds: The Case of the Owner's Curse," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 679-704.
    2. Michael J. Fishman, 1988. "A Theory of Preemptive Takeover Bidding," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 88-101, Spring.
    3. Karpoff, Jonathan M. & Malatesta, Paul H., 1989. "The wealth effects of second-generation state takeover legislation," Journal of Financial Economics, Elsevier, vol. 25(2), pages 291-322, December.
    4. Chowdhry, Bhagwan & Jegadeesh, Narasimhan, 1994. "Pre-Tender Offer Share Acquisition Strategy in Takeovers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(01), pages 117-129, March.
    5. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    6. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
    7. Lucian Arye Bebchuk, 1994. "Efficient and Inefficient Sales of Corporate Control," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 957-993.
    8. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions


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