A Historical Perspective on the International Evidence for Long-Term Reversals

Abstract

This paper reexamines the international long-term reversal evidence. Using a longer time horizon and expanding the number of country indices, it is shown that long-term reversals results differ across methodology, start date, and time horizon. Due to the fact that the major international equity data sets start around the same time, a small period of years accounts for the strong long-term contrarian profits documented in the international literature. More importantly, the long-term contrarian profits do not survive when transaction costs are considered. A final implication of this research is that the international tests based on US-dollar denominated data may not capture the experience of the marginal investor.

Keywords: Behavioral finance, long-term reversals, market efficiency

JEL Classification: G12, G13, G14, G22