Overreaction evidence from large-cap stocks

Tibebe Abebe Assefa, Omar Esqueda and Emilios C. Galariotis ()
Additional contact information
Tibebe Abebe Assefa: Kentucky State University
Emilios C. Galariotis: Audencia Recherche - Audencia Business School

Post-Print from HAL

Abstract: The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers' gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed. Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart's (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy. The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios' alphas are significant, suggesting that the CAPM and the multifactor models are unable to explain return differentials between winners and losers. Our evidence supports two main conclusions. First, stock market overreaction still holds for a sample of large firms. Second, this is robust to the Fama and French's (1993, 1996) three-factor model and Carhart's (1997) momentum portfolio. Findings emphasize the relevance of a contrarian strategy when rebalancing investment portfolios. Portfolio managers can improve stock returns by selling past winners and buying previous loser large-cap US stocks. This paper is the first, to the authors' knowledge, to examine frequently traded large-cap US stocks to avoid infrequent trading and size concerns.

Keywords: CAPM; Stock market anomaly; Overreaction; Three-factor model (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations:

Published in Review of Accounting and Finance, 2014, 13 (4), pp.310-325. ⟨10.1108/RAF-05-2013-0072⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Overreaction evidence from large-cap stocks (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01081971

DOI: 10.1108/RAF-05-2013-0072

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().