32 Pages Posted: 2 Dec 2008
Date Written: April 22, 2008
We propose a new class of investable momentum and contrarian stock-market indices that partition a benchmark index, such as the Russell 1000. Our momentum indices overweight stocks that have recently outperformed, while our contrarian indices underweight these same stocks. Our index construction methodology is extremely flexible, and allows the index provider to trade-off the distinctiveness of the momentum/contrarian strategies with portfolio turnover. Momentum investment styles in particular typically entail a high level of turnover, and hence high associated transaction costs. The creation of momentum and contrarian indices and exchange traded funds (ETFs) based on our methodology would allow investors to access these styles at lower cost than is currently possible. Our indices also provide performance benchmarks for momentum/contrarian investment managers, and good proxies for a momentum factor. Over the period 1995-2007 we find that short term momentum and long term contrarian indices outperform the reference Russell 1000 index. We also document the changing interaction between the momentum/contrarian and value/growth styles.
Keywords: Momentum index, Contrarian index, Performance measurement, Turnover
JEL Classification: C43, G11, G23
Suggested Citation: Suggested Citation
Hill, Robert J. and Eggins, Jon, Momentum and Contrarian Stock-Market Indices (April 22, 2008). UNSW Australian School of Business Research Paper No. 2008 ECON 07. Available at SSRN: https://ssrn.com/abstract=1310286 or http://dx.doi.org/10.2139/ssrn.1310286
By Nassim Taleb