The Robustness of Abnormal Returns from the Earnings Yield Contrarian Investment Strategy
Posted: 4 Oct 2000
We examine the sensitivity of the abnormal profitability of the earnings' yield (E/P)-based contrarian investment strategy to the following two risk measurement issues: (1) return measurement interval over which systematic risk is estimated and (2) time variation in systematic risk. We conduct our analysis using the capital asset pricing model to parameterize risk. We find that the estimates of systematic risk of E/P-ranked portfolios are not sensitive to the return measurement interval, and consequently the abnormal profits to the E/P-based contrarian investment strategy observed in prior studies are not artifacts of the return measurement interval. Further, although both the raw and abnormal returns to E/P-ranked portfolios exhibit mean reversion, time variation in systematic risk ensuing from this mean reverting behavior does not substantially effect abnormal profits to E/P-ranked portfolios.
JEL Classification: G11, G12, G14
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