Does Time Variation in Systematic Risk Affect the Profitability of Contrarian Investment Strategies?

34 Pages Posted: 20 Jun 2002

See all articles by Antonios Antoniou

Antonios Antoniou

Wealth Associates

Emilios C. Galariotis

Audencia Business School

Spyros I. Spyrou

Athens University of Economics and Business - Department of Accounting and Finance

Abstract

Recent empirical studies seem to suggest that contrarian strategies make substantial profits that may be inconsistent with informationaly efficient markets. This paper examines whether the detection of contrarian profits is sensitive to the definition of abnormal returns and the duration of the formation and testing periods and investigates the effect of well-known monthly seasonals on the empirical results. Furthermore, in view of recent evidence that beta risk is not constant, the paper employs a procedure that allows for time-variation in systematic risk, and also examines whether abnormal returns of contrarian strategies are normal compensation for changes in risk between portfolio formation and portfolio testing period. No empirical evidence on contrarian profits exist so far for the Athens Stock Exchange, an emerging market for which one would expect more return predictability. To anticipate the results, we find that longer horizon contrarian strategies are more profitable than shorter horizon strategies. However, contrarian profits are very sensitive to the specification of abnormal returns, i.e. when we allow beta risk to vary over time most of the profits from contrarian strategies disappear. Furthermore, even for the case where we do detect arbitrage profits the results indicate that they may be due to changes in market risk.

Note: Previously titled "Does Time Variation in Systematic Risk Affect the Profitability of Contrarian Investment Strategies? The Case of the Athens Stock Exchange"

Keywords: Return Predictability, Contrarian Profits, Emerging Stock Markets, Kalman Filter

JEL Classification: G1

Suggested Citation

Antoniou, Antonios and Galariotis, Emilios C. and Spyrou, Spyros I., Does Time Variation in Systematic Risk Affect the Profitability of Contrarian Investment Strategies?. EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314876 or http://dx.doi.org/10.2139/ssrn.314876

Antonios Antoniou

Wealth Associates ( email )

Alpine House,
Honeypot Lane
London, NW9 9RX
United Kingdom

Emilios C. Galariotis

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

HOME PAGE: http://faculte-recherche.audencia.com/en/faculty/faculty-member-cvs/emilios-galariotis/

Spyros I. Spyrou (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

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