Profitability of Short-Term Contrarian Strategies: Implications for Market Efficiency

Jennifer Conrad, Mustafa N Gultekin and Gautam Kaul ()

Journal of Business & Economic Statistics, 1997, vol. 15, issue 3, 379-86

Abstract: In recent years, several researchers have argued that the stock market consistently overreacts to new information, which, in turn, results in price reversals. B. N. Lehmann (1990) and others showed that a contrarian can make substantial profits in the short run by simply buying losers and selling winners. The authors, however, demonstrate that these profits are largely generated by the bid-ask bounce in transaction prices; accounting for this 'bounce' by using bid prices eliminates all profits from price reversals for NASDAQ-NMS stocks and most of the profits for NYSE/AMEX stocks. Moreover, any remaining profits (regardless of their source) disappear at trivial levels of transaction costs.

Date: 1997
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