Are Reversals Predictable in Emerging Stock Markets? The Role of Market States and Global Factors

Abstract

This paper examines the time-series predictability of reversals in an emerging stock market, Borsa Istanbul. We find that the state of the market has significant predictive power over payoffs to the contrarian strategy. The profitability of the contrarian strategy is primarily driven by short-term reversals for past winner stocks, particularly following negative market states. On the other hand, oil return is found to absorb much of the predictive power of macroeconomic variables and global risk proxies. We argue that the predictability of contrarian payoffs could be utilized to improve the profitability of contrarian strategies via conditional models.

Keywords: Reversals, Emerging Markets, Oil Price, Borsa Istanbul

JEL Classification: G14, G15