Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964–2005

Emilios C. Galariotis (), Phil Holmes () and Xiaodong S. Ma ()
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Emilios C. Galariotis: Durham Business School - Durham University
Phil Holmes: Durham Business School - Durham University
Xiaodong S. Ma: WBS - Warwick Business School - University of Warwick [Coventry]

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Abstract: We provide evidence relating to contrarian and momentum profits for the LSE, using 64 strategies for all 6531 stocks traded from 1964 to 2005. Thorough analysis demands controlling for key potential (contradictory) explanations of the strategies' profitability which span psychological characteristics (e.g. overreaction/underreaction), excess risk, seasonality, size, and microstructure induced biases. Results provide a measurement of the miscalculations which occur when ignoring survivorship and microstructure biases. Contrarian/momentum profits cannot be explained by seasonality, size, or a single factor risk model. However, the Fama–French three factor model rationalises all contrarian profits. Important differences are found when examining a truncated sample period demonstrating the need to recognise that financial markets can change markedly through time.

Keywords: Overreaction; Underreaction; London Stock Exchange (search for similar items in EconPapers)
Date: 2008
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Published in Journal of Multinational Financial Management, 2008, 17 (5), pp.432-447. ⟨10.1016/j.mulfin.2007.01.003⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01091120

DOI: 10.1016/j.mulfin.2007.01.003

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