Testing the Profitability of Contrarian Trading Strategies Based on the Overreaction Hypothesis
Matthieu Duvinage and
Paolo Mazza ()
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Matthieu Duvinage: National Bank of Belgium
Bankers, Markets & Investors, 2014, issue 133, 4-10
We develop 200 contrarian trading strategies based on significant market variations to test whether it is possible to benefit from the well-known psychological bias of overreaction that plagues investors. We conduct the most recent and appropriate statistical tests to ensure that none of these active strategies beats the buy-and-hold strategy due to pure luck only. Each of these strategies are tested on 13 different underlying assets, including exchange rates and stock indexes. When both transaction and borrowing costs are taken into account, our empirical results suggest that the use of significant market variations as daily reversal signals does not lead to any abnormal profit.
Keywords: Return Predictability; High Market Variation; Overreaction; Behaviorial Bias; SSPA (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
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Working Paper: Testing the profitability of contrarian trading strategies based on the overreaction hypothesis (2014)
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