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Contrarian and Momentum Strategies: The Impact of the Business Cycle Discussion

Contrarian and Momentum Strategies: The Impact of the Business Cycle Discussion. A.G. Malliaris Loyola University Chicago Multinational Finance Society Meetings Rome, Italy, June 26-29, 2011. Purpose of the Paper.

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Contrarian and Momentum Strategies: The Impact of the Business Cycle Discussion

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  1. Contrarian and Momentum Strategies: The Impact of the Business CycleDiscussion A.G. Malliaris Loyola University Chicago Multinational Finance Society Meetings Rome, Italy, June 26-29, 2011

  2. Purpose of the Paper • Revisit and extend previous work regarding momentum and contrarian strategies • There exists a large literature on these topics developed during the last 20 years • Buy stocks based on superior past six-month returns and hold them for following six months to obtain significant positive returns

  3. More Past Results • The market responds slowly to new information • Underreactionof stock prices to news such as earnings announcements, but an overreaction of stock prices to a series of good or bad news. • Momentum strategies disappear once stock returns are adjusted for their predictability based on certain macroeconomic variables

  4. Few More Results • Profitability of momentum strategies is influenced by bull and bear markets. • Firm size, transactions costs, analysts’ forecasts and global dimensions also play important role. • Contrarian strategies often are successful because of overconfidence of both traders and shareholders.

  5. What is Needed • Is there a Unified Story? • Are Momentum and Contrarian separate or integrated? • How can we Develop a Comprehensive Framework?

  6. Sample and Methodology • CRSP data from January 1972 to December 2009 • Raw Contrarian and Momentum Profits • Profits Related to Business Cycles • Related to Firm Size and Business Cycle • Add Firm Size and Analysts’ Forecasts • Impressive Amount of Work

  7. Findings • Confirm that contrarian and momentum strategies still yield a significant return on average. • Most of the contrarian profits are realized in January, while most of the momentum profits are realized in non-January months. • Contrarian strategies, while only marginally successful during expansionary periods, produce a statistically significant returns during contractionary periods

  8. More Findings • Momentum strategies yield statistically significant returns during expansionary periods. • Choose small stocks for contrarian strategy and large stocks for momentum strategy. • These strategies are more successful with stocks with lower residual analyst coverage.

  9. More Results • Firm size seems to dominate the effect of analyst coverage. • Contrarian strategies proves to be a more profitable after extreme market movements either up or down.

  10. Evaluation • Excellent paper; good biblio; good methodology; ambitious agenda; bold and unifying • Booms and busts very critical • Firm size also important • We still do not have a comprehensive theory • In-sample vs. out-of-sample testing • What are the enduring strategies? • How do derivative markets behave?

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