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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

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

purpose of the paper
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
more past results
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
few more results
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.
what is needed
What is Needed
  • Is there a Unified Story?
  • Are Momentum and Contrarian separate or integrated?
  • How can we Develop a Comprehensive Framework?
sample and methodology
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
findings
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
more findings
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.
more results
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.
evaluation
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?