Introduction to momentum and contrarian trading strategies

Contrarian - investors buy stocks that have performed poorly and sell stock that have performed well

Momentum - investors buy stocks that are rising in value with the anticipation of earnings acceleration

Aggregate evidence of profitability of momentum and contrarian trading strategies

DeBondt & Thaler (1984)

From 1926 to 1982, “loser” portfolios outperformed the market by 19.6% after 36 months while “winner” portfolios earned 5% less than market. Contrarian strategy 25% net more than momentum strategies.

Jagedeesh & Titman (1993)

Evidence of price momentum over 3 to 12 month periods. Momentum strategy - buy “winners”, sell “losers: Average gain of “zero cost portfolio” is 1 % per month

Lakonishok, Shleifer, and Vishny (1994)

“Value” stocks outperformed “glamour” stocks on the NYSE and AMEX from 1968 to 1989 for 1 and 5 year horizons.（价值股：价值被低估；成长股：追随者多，价格有望在短期内再创新高）

“Value” stocks – high book-to-market ratio (B/M)

“Glamour” stocks – low book-to-market ratio (B/M)

Contrarian strategy - buy “value”, sell “growth”：Value stocks out-perform growth stocks by 10.5 percent per year on average over the five years

Conrad & Kaul (1998)

Test 120 momentum and contrarian trading strategies and find that most do not yield positive profits

However, they do find that momentum strategies at the 3-12 month horizon are generally able to yield statistically significant profits

Critically evaluate the evidence:(否极泰来, walk the dog, regression to mean)

investors extrapolate past performance too far into the future, overpricing (underpricing) firms with recent good (poor) performance

Investors seem too pessimistic (optimistic) about the future according to recent poor (good) performance

Ultimately investors recognize their errors and prices reverse when too-extreme expectations are corrected, firms with recent poor performance outperform firms with recent good performance 

Empirical evidence of individual investor trading strategies

Grinblatt et al. (1995); Grinblatt and Keloharju (2001)

Mutual fund managers follow momentum strategies, as do sophisticated individual investors, while less sophisticated investors follow contrarian strategies

Griffin, Harris and Topaloglu (2003)

Top performing decile of securities is 23.9 % more likely to be bought in net by institutions (and be sold by individuals) than those in the bottom performance decile

Institutions are momentum investors and tend to follow past intradaily excess stock returns

Ng and Wu (2007)

Find that Chinese institutions and wealthy individuals are momentum investors, while less wealthy individuals are contrarian investors

•Wongchotiet al. (2009) 在面对已经持续一段时间的涨势的股票，个人交易量与策略选取的关系。

Large trade-size investors adopt momentum strategies following high returns (increasing their buy volume). 买入更多的成长股,追高

Small trade-size investors adopt contrarian strategies following high returns (increasing their sell volume). 卖出更多的成长股，

•Badrinathand Wahal(2002)

Find that institutions are momentum traders for entries, but contrarian traders for exits or adjustments. 入场时选择追高，调仓时选择杀低。

Duxbury and Yao (2012) 个人选择策略不是固定的，两种都用到了

all investors adopt momentum strategies when adding stocks to their portfolios and contrarian strategies when selling stocks.

Demonstrate that the adoption of momentum or contrarian trading strategies is not merely an artefact of invertors’ reactions to characteristics of particular stocks nor is it driven purely by an attraction to extreme price changes

implications of such evidence for market efficiency.

all the information reflect on the price? no 

rational traders? not really