Testing the Profitability of Contrarian Trading Strategies Based on the Overreaction Hypothesis

Bankers, Markets, and Investors, Vol. 133, 2014

17 Pages Posted: 22 Jan 2016 Last revised: 28 Apr 2021

See all articles by Matthieu Du Duvinage

Matthieu Du Duvinage

National Bank of Belgium

Paolo Mazza

IESEG School of Management; LEM CNRS 9221

Mikael Petitjean

Catholic University of Lille - IÉSEG School of Management, Lille Campus; Lille Economie & Management (LEM) UMR 9221; Louvain School of Management (UCL); Catholic University of Louvain (UCL) - Louvain Finance (LFIN)

Date Written: September 17, 2014

Abstract

We develop 200 contrarian trading strategies based on significant market variations to test whether it is possible to benefit from the well-known psychological bias of overreaction that plagues investors. We conduct the most recent and appropriate statistical tests to ensure that none of these active strategies beats the buy-and-hold strategy due to pure luck only. Each of these strategies are tested on 13 di fferent underlying assets, including exchange rates and stock indexes. When both transaction and borrowing costs are taken into account, our empirical results suggest that the use of signicant market variations as daily reversal signals does not lead to any abnormal profit.

Keywords: Return predictability, high market variation, overreaction, behaviorial bias, SSPA

JEL Classification: G14

Suggested Citation

Duvinage, Matthieu Du and Mazza, Paolo and Petitjean, Mikael, Testing the Profitability of Contrarian Trading Strategies Based on the Overreaction Hypothesis (September 17, 2014). Bankers, Markets, and Investors, Vol. 133, 2014, Available at SSRN: https://ssrn.com/abstract=2720392

Matthieu Du Duvinage

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Paolo Mazza

IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Lille, 59 59000
France

HOME PAGE: http://https://sites.google.com/site/paolomazzaphd/

LEM CNRS 9221 ( email )

Mikael Petitjean (Contact Author)

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France
0032497301266 (Phone)
59000 (Fax)

Lille Economie & Management (LEM) UMR 9221 ( email )

Lille
France

Louvain School of Management (UCL) ( email )

Belgium

Catholic University of Louvain (UCL) - Louvain Finance (LFIN) ( email )

34 Voie du Roman Pays - L1.03.01
Louvain-la-Neuve, 1348
Belgium

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