Momentum and Contrarian Stock-Market Indices

Jon Eggins () and Robert Hill ()
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Jon Eggins: Russell Investment Group

No 2008-07, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We propose a new class of investable momentum and contrarian stock-market indices that partition a benchmark index, such as the Russell 1000. Our momentum indices overweight stocks that have recently outperformed, while our contrarian indices underweight these same stocks. Our index construction methodology is extremely flexible, and allows the index provider to trade-off the distinctiveness of the momentum/contrarian strategies with portfolio turnover. Momentum investment styles in particular typically entail a high level of turnover, and hence high associated transaction costs. The creation of momentum and contrarian indices and exchange traded funds (ETFs) based on our methodology would allow investors to access these styles at lower cost than is currently possible. Our indices also provide performance benchmarks for momentum/contrarian investment managers, and good proxies for a momentum factor. Over the period 1995- 2007 we find that short term momentum and long term contrarian indices outperform the reference Russell 1000 index. We also document the changing interaction between the momentum/contrarian and value/growth styles.

Keywords: Momentum index; Contrarian index; Performance measurement; Turnover; Momentum factor; Behavioral finance (search for similar items in EconPapers)
JEL-codes: C43 G11 G23 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-05
New Economics Papers: this item is included in nep-fmk
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