• Selected
• Entire List

Abstract:
One of the most important topics in financial literature is the market efficiency hypothesis. In the last couple of decades, most studies have questioned this hypothesis and several authors have shown that the contrarian strategy, or the forming of a zero-investment portfolio that buys the stocks that have performed poorly in the past (losers) and sells those that have performed well (winners), creates abnormally positive returns in the future. Many hypotheses have been suggested in an attempt to explain such strange behaviour by the market, but the most widely discussed is the so-called over-reaction effect. In this paper we analyse the contrarian strategy in the empirical context of the Spanish stock market, using three-year periods, not only to form the portfolios of winners and losers, but also to analyse the future performance of the stocks involved. We employ an arithmetical method to evaluate the returns and the buy-and-hold procedures. We follow the methods proposed by De Bondt and Thaler (1985), Chan (1988), Conrad and Kaul (1993) and Ball and Kothari (1989). By using these procedures, we are able to take the risk and the problems linked with the measurement errors into account. We arrive at the conclusion that, with the use of three-year periods, the contrarian strategy does not beat the market and, therefore, no over-reaction effect is observed in the Spanish stock market. These results, however, do not agree with previous evidence published on this market.

Efficiency, overreaction, risk, beta

Abstract:
Previous evidence has demonstrated that the momentum effect is present in the Spanish stock market, and that it can not bee explained neither by the CAPM nor the Fama & French (1993) three factor model. The aim of this paper is to deepen in the possible explanations of such phenomenon by analyzing two new items. In the first part, the possibility that the momentum profits were the recompense for bearing some kind of risk not incorporated in this two models has been studied. Given the failure of this first approach, in the second part, the behavioural models of Daniel et al. (1998) and Hong and Stein (1999) have been tested, by facing the momentum profits to the size, book-to-market and analyst coverage characteristics. While the results show that the momentum profits focus on small stocks, restrictions in the data hinder to obtain conclusive results regarding the validity of these two models in explaining the Spanish momentum.

momentum, risk factors, behavioural models

Abstract:
There is extensive international evidence that the momentum strategy yields positive abnormal returns when short-term periods are considered, whereas the contrarian strategy is effective for long-term periods. However, this topic has received scarce attention in the Spanish stock market. We show that these two phenomena seem to be present in this market, and in particular that the 12-month momentum strategy and the 60-month contrarian strategy yield positive abnormal returns, although the effectiveness of the contrarian strategy is under suspicion when non-overlapping test periods are used. Our study therefore provides additional evidence that the results obtained in the literature on this topic are not from data snooping.

Efficiency, Contrarian Strategy, Momentum Strategy, Risk

Abstract:
Our study examines whether behavioural theories can explain post-earnings announcement drift (i.e., earnings momentum) in the Spanish market. In particular, we test models proposed by Daniel, Hirshleifer, and Subrahmanyan (1998), Hong and Stein (1999), and Barberis, Shleifer, and Vishny (1998). Each of these behavioural models draws on two premises – cognitive biases and limits to arbitrage – that we assume will vary with a given country's cultural and institutional features. Therefore, we must exercise caution when extrapolating the favourable results observed in the U.S. market to markets outside of the United States. Our results provide little evidence in support of the hypothesis used to test whether these models can indeed explain the earnings momentum anomaly in the Spanish market. We believe some characteristics of the Spanish market, such as its lower score on the Individualism Index, lower levels of investor protection, and code law–based legal system, may explain why our results differ from those obtained in the United States.

post-earnings announcement drift, momentum, behavioural finance