When Are Contrarian Profits Due to Stock Market Overreaction
Andrew W. Lo,A. Craig MacKinlay +1 more
TLDR
In this article, the authors show that despite negative autocorrelation in individual stock returns, weekly portfolio returns are strongly positively auto-correlated and are the result of important cross-autocorrelations.Abstract:
If returns on some stocks systematically lead or lag those of others, a portfolio strategy 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 overreaction imply. Using a particular contrarian strategy, the authors show that, despite negative autocorrelation in individual stock returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations. The authors find that the returns of large stocks lead those of smaller stocks, and present evidence against overreaction as the only source of contrarian profits. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.read more
Citations
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Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
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Efficient Capital Markets: II
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Introduction to Econophysics: Correlations and Complexity in Finance
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Simple Technical Trading Rules and the Stochastic Properties of Stock Returns
TL;DR: In this article, the authors used the Dow Jones Index from 1897 to 1986 to test two of the simplest and most popular trading rules (moving average and trading range break) by utilizing the bootstrap techniques.
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Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies
TL;DR: In this article, the authors test the gradual information-diffusion model of Hong and Stein ~1999! and establish three key results: once one moves past the very smallest stocks, the profitability of momentum strategies declines sharply with firm size.
References
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Efficient capital markets: a review of theory and empirical work*
TL;DR: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 as mentioned in this paper
ReportDOI
A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix
Whitney K. Newey,Kenneth D. West +1 more
TL;DR: In this article, a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction is described.
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Does the Stock Market Overreact
TL;DR: In this article, a study of market efficiency investigates whether people tend to "overreact" to unexpected and dramatic news events and whether such behavior affects stock prices, based on CRSP monthly return data, is consistent with the overreaction hypothesis.
Journal ArticleDOI
Asset prices in an exchange economy
TL;DR: In this article, the authors examine the stochastic behavior of equilibrium asset prices in a one-good, pure exchange economy with identical consumers, and derive a functional equation for price as a function of the physical state of the economy.