When Are Contrarian Profits Due to Stock Market Overreaction?

Andrew Lo () and A Craig MacKinlay

The Review of Financial Studies, 1990, vol. 3, issue 2, 175-205

Abstract: If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells "winners" and buys "losers" can produce positive expected returns, even if no stock's returns are negatively autocorrelated as virtually all models of overreaction imply. Using a particular contrarian strategy, the authors show that, despite negative autocorrelation in individual stock returns, weekly portfolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations. The authors find that the returns of large stocks lead those of smaller stocks, and present evidence against overreaction as the only source of contrarian profits. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1990
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Working Paper: When are contrarian profits due to stock market overreaction? (1989)
Working Paper: When are Contrarian Profits Due to Stock Market Overreaction? (1989)
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