Portfolio Selection with Contrarian Strategy

Zhichao Lu, Peiyuan Pang, Yuhong Xu () and Wenxin Zhang
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Zhichao Lu: Soochow University
Peiyuan Pang: Soochow University
Yuhong Xu: Soochow University
Wenxin Zhang: Soochow University

Methodology and Computing in Applied Probability, 2024, vol. 26, issue 2, 1-28

Abstract: Abstract Compared with the extensive empirical literature on contrarian strategy, we develop a dynamic mean-variance model with geometric value-reversion asset prices, which implies a contrarian strategy. The model is solved (semi) explicitly under three asset price evaluations: constant valuation, exponential-varying valuation, and geometric average valuation. From a mathematical perspective, it is nontrivial to solve the extended HJB equations under stochastic opportunities. We demonstrate that our strategy exhibits the same monotonicity as that of the traditional constant relative risk-averse utility, and the welfare loss of using the dynamic mean-variance criterion is rather small, supporting that our model is a good approximation to the constant relative risk-averse utility. Empirical tests show that our strategies can help an investor achieve a less volatile wealth trajectory.

Keywords: Portfolio selection; Contrarian strategy; Geometric mean-reversion process; Mean variance (search for similar items in EconPapers)
JEL-codes: C61 D81 G11 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11009-024-10085-y

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