Contrarian profits of the firm-specific component on stock returns

Joon Chae and Ryumi Kim

Pacific-Basin Finance Journal, 2020, vol. 61, issue C

Abstract: A weekly contrarian strategy based on residual stock returns provides larger, more significant, and steadier profits than conventional contrarian strategies, which use total returns. We decompose residual return-based contrarian profits by modifying the decomposition methodology in Lo and MacKinlay (1990). This decomposition reveals that the residual return-based contrarian profits are attributed to negative autocovariances in individual residual returns, rather than positive cross-serial covariances across residual returns. We further decompose Lo and MacKinlay's decomposition, and reveal that winners are strongly negatively autocorrelated. In conclusion, investors' overreactions to good firm-specific news are a primary source of residual contrarian profits.

Keywords: Contrarian strategy; Residual returns; Contrarian profit decomposition; Autocovariance; Cross-serial covariance (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G17 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:61:y:2020:i:c:s0927538x17301737

DOI: 10.1016/j.pacfin.2019.101176

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