A Study of Momentum and Contrarian Strategies Based Portfolios in US Market

Abstract

Paper studies the mean reversion phenomena and momentum phenomena in the standard and poor 100 stocks index in US markets by forming the portfolio by varying sizes of 10 stocks, 20 stocks and 30 stocks. The resilience parameter of stock in terms of price is used to calculate a ratio. This ratio is undertaken as the identifying the stocks for the portfolio formation. Various portfolios are formed on the basis of number of observation days and holding period. Momentum portfolio provides the negative returns for all the short and long term portfolios. Whereas, the portfolios based on contrarian strategy were providing the significant positive return across all the holding periods. It is also found that the highest returns were generated by portfolios which were formed on the basis of one previous day information for selection of stocks, rather than longer historical information. The presences of abnormal returns reflect the semi strong form of market efficiency. Hence the market investors can build the portfolio on the basis of historical information with mean reversion and momentum characteristics in order to generate abnormal returns.

Keywords: Momentum, Contrarian, Mean reversion, Portfolio performance

JEL Classification: g11, g14