Hostname: page-component-848d4c4894-wzw2p Total loading time: 0 Render date: 2024-05-29T16:44:53.942Z Has data issue: false hasContentIssue false
  • English
  • Français

The Contrarian Investment Strategy Does Not Work in Canadian Markets

Published online by Cambridge University Press:  06 April 2009

Lawrence Kryzanowski  and
Hao Zhang
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper tests the overreaction hypothesis using monthly data for stocks listed on the Toronto Stock Exchange over the 1950–1988 period. Unlike De Bondt and Thaler (1985), (1987), it finds statistically significant continuation behavior for the next one (and two) year(s) for winners and losers, and insignificant reversal behavior for winners and losers over longer formation/test periods of up to ten years. While the systematic risks of the winners decrease significantly over all test periods, the systematic risks of the losers increase significantly for only the 12-month formation/test periods (unlike Chan (1988)). The only significant change in variance from the formation to test periods occurs for the losers for the 12-month formation/test periods. The findings are robust for January versus non-January and size-based portfolios (unlike Zarowin (1989), (1990)). The findings are robust for various performance measures (specifically, market-adjusted CAR, and the Jensen (1968) and Sharpe (1966) portfolio performance measures).

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992 , pp. 383 - 395
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ball, R., and Kothari, S. P.. “Nonstationary Expected Returns: Implications for Tests of Market Efficiency and Serial Correlation in Returns.” Journal of Financial Economics, 25 (1989), 51–74.CrossRefGoogle Scholar
Bremer, M. A., and Sweeney, R. J.. “The Information Content of Extreme Negative Rates of Return.” Working Paper, Claremont McKenna College (1988).Google Scholar
Brown, K. C., and Harlow, M. V.. “Market Overreaction: Magnitude and Intensity.” Journal of Portfolio Management, 14 (1988), 6–13.CrossRefGoogle Scholar
Chan, K. C. “On the Contrarian Investment Strategy.” Journal of Business, 61 (1988), 147–163.CrossRefGoogle Scholar
Davidson, W. N., and Dutia, D.. “A Note on the Behaviour of Security Returns: A Test of Stock Market Overreaction and Efficiency.” Journal of Financial Research, 12 (1989), 245–252.CrossRefGoogle Scholar
De Bondt, W. F., and Thaler, R. H.. “Does the Stock Market Overreact?” Journal of Finance, 40 (1985), 793–805.CrossRefGoogle Scholar
De Bondt, W. F., and Thaler, R. H.. “Further Evidence on Investor Overreaction and Stock Market Seasonality.” Journal of Finance, 47 (1987), 557–581.CrossRefGoogle Scholar
De Bondt, W. F., and Thaler, R. H.. “A Mean-Reverting Walk Down Wall Street.” Journal of Economic Perspectives, 3 (1989), 189–202.CrossRefGoogle Scholar
De Bondt, W. F., and Thaler, R. H.. “Do Security Analysts Overreact?” American Economic Review, 80 (1990), 52–57.Google Scholar
Engle, R. F. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of U.K. Inflation.” Econometrica, 50 (1982), 987–1008.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Factors in the Serial Correlation of Stock Returns.” Working Paper, Graduate School of Business, Univ. of Chicago (1986).Google Scholar
Graham, B.The Intelligent Investor: A Book of Practical Counsel. New York: Harper & Brothers Publishers, 3rd ed. (1959).Google Scholar
Grether, D. M. “Bayes' Rule as a Descriptive Model: The Representativeness Heuristic.” Quarterly Journal of Economics, 95 (1980), 537–557.CrossRefGoogle Scholar
Howe, J. S. “Evidence on Stock Market Overreaction.” Financial Analysts Journal, 41 (1986), 74–77.CrossRefGoogle Scholar
Jensen, M. C. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–416.Google Scholar
Jobson, J. D., and Korkie, B. M.. “Performance Hypothesis Testing with the Sharpe and Treynor Measures.” Journal of Finance, 36 (1981), 889–908.CrossRefGoogle Scholar
Kryzanowski, L., and Sim, A. B.. “Hypothesis Testing with the Sharpe and Treynor Portfolio Performance Measures Given Non-synchronous Trading.” Economics Letters, 32 (1990), 345–352.CrossRefGoogle Scholar
Learner, E. E. “Let's Take the Con Out of Econometrics.” American Economic Review, 75 (1983), 31–43.Google Scholar
Learner, E. E. “Sensitivity Analysis Would Help.” American Economic Review, 75 (1985), 308–313.Google Scholar
Lehmann, B. N. “Fads, Martingales and Market Efficiency.” Quarterly Journal of Economics, 105 (1990), 1–28.CrossRefGoogle Scholar
Mao, C. K.; Rao, R.; and Sears, R. S.. “Limit Moves and Price Resolution: The Case of the Treasury Bond Futures Market.” Journal of Futures Markets, 9 (1989), 321–335.CrossRefGoogle Scholar
Poterba, J. M., and Summers, L. H.. “Mean Reversion in Stock Prices: Evidence and Implications.” Journal of Financial Economics, 22 (1988), 27–59.CrossRefGoogle Scholar
Roll, R. “Ambiguity when Performance is Measured by the Securities Market Line.” Journal of Finance, 33 (1978), 1051–1069.CrossRefGoogle Scholar
Rosenberg, B.; Reid, K.; and Lanstein, R.. “Persuasive Evidence of Market Inefficiency.” Journal of Portfolio Management, 11 (1985), 9–16.CrossRefGoogle Scholar
Scholes, M., and Williams, J.. “Estimating Betas from Non-synchronous Data.” Journal of Financial Economics, 5 (1977), 309–327.CrossRefGoogle Scholar
Seyhun, H. N. “Overreaction or Fundamentals: Some Lessons from Insiders' Response to the Market Crash of 1987.” Journal of Finance, 45 (1990), 1363–1388.CrossRefGoogle Scholar
Sharpe, W. F. “Mututal Fund Performance.” Journal of Business, 39 (1966), 119–138.CrossRefGoogle Scholar
Stein, J. “Overreactions in the Options Market.” Journal of Finance, 44 (1989), 1011–1024.CrossRefGoogle Scholar
Zarowin, P. “Does the Stock Market Overreact to Corporate Earnings Information.” Journal of Finance, 44 (1989), 1385–1399.Google Scholar
Zarowin, P. “Size, Seasonality, and Stock Market Overreaction.” Journal of Financial and Quantitative Analysis, 25 (1990), 113–125.CrossRefGoogle Scholar
Zivney, T. L., and Thompson, D. J. II. “The Specification and Power of the Sign Test in Measuring Security Price Performance: Comments and Analysis.” The Financial Review, 24 (1989), 581–588.CrossRefGoogle Scholar