Systematic Risk and the Performance of Mutual Funds Pursuing Momentum and Contrarian Trades

30 Pages Posted: 24 Aug 2009

See all articles by Grant Cullen

Grant Cullen

Murdoch University

Dominic Gasbarro

Murdoch University

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: August 23, 2009

Abstract

We examine mutual fund trading activity to determine whether they rebalance their portfolios towards stocks that were recent superior performers (a momentum strategy) or towards stocks that recently underperformed (a contrarian strategy). Using 2,829 funds with 49,661 fund-periods between 1991 and 2005, we find that around 15% of the funds exhibit contrarian trading behavior with a similar percentage following a momentum strategy. We highlight the importance of a stock’s risk to traders adopting momentum and contrarian strategies. Mutual funds that follow a momentum strategy and acquire high-risk stocks improve their performance, while those following a contrarian strategy in these stocks diminish their performance. Both contrarian and momentum trading behavior by funds persists.

Keywords: Mutual fund, contrarian, momentum, risk

JEL Classification: G2, G11, G14, G23

Suggested Citation

Cullen, Grant Stewart and Gasbarro, Dominic and Monroe, Gary S. and Zumwalt, J. Kenton, Systematic Risk and the Performance of Mutual Funds Pursuing Momentum and Contrarian Trades (August 23, 2009). 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1460353 or http://dx.doi.org/10.2139/ssrn.1460353

Grant Stewart Cullen (Contact Author)

Murdoch University ( email )

Murdoch, WA 6150
Australia
618 9360 6026 (Phone)
618 9310 5004 (Fax)

Dominic Gasbarro

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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