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Contrarian Investment and Macroeconomic Risk

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  • Alan Gregory
  • Richard D.F. Harris
  • Maria Michou

Abstract

It is now widely accepted that contrarian, or value investment strategies deliver superior returns. Gregory, Harris and Michou (2001) examine the performance of contrarian investment strategies in the UK and find that value strategies formed on the basis of a wide range of measures of value have delivered excess returns that are both statistically and economically significant. However, while value strategies appear to be profitable, the reason for their superior perform‐ ance is far from clear. Under the contrarian model, value strategies are profitable because they are contrarian to naïve strategies such as those that erroneously extrapolate past performance, while under the rational pricing model, value strategies are profitable because they are fundamentally riskier in some sense. In this paper, we discriminate between these two possibilities by undertaking a comprehensive investigation of the relationship between the returns to value investment strategies and various macroeconomic state variables that in a multi‐factor asset pricing model could reasonably be taken as proxies for risk. Moreover, we examine whether the returns to value strategies predict future GDP, consumption and investment growth over and above the contribution of the Fama and French (1993 and 1996) SMB, HML and market factors. While the SMB and HML factors behave in a manner consistent with the rational pricing model, we show that some value strategies in the UK are able to generate excess returns that do not seem to be related to known risk factors.

Suggested Citation

  • Alan Gregory & Richard D.F. Harris & Maria Michou, 2003. "Contrarian Investment and Macroeconomic Risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1‐2), pages 213-256, January.
    • Handle: RePEc:bla:jbfnac:v:30:y:2003:i:1-2:p:213-256
    DOI: 10.1111/1468-5957.00004
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    References listed on IDEAS

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    1. Alan Gregory & Richard D.F. Harris & Maria Michou, 2001. "An Analysis of Contrarian Investment Strategies in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(9‐10), pages 1192-1228, November.
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    3. Iwan Brouwer, 1997. "Contrarian Investment Strategies in a European Context," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(9&10), pages 1353-1366.
    4. Basu, S, 1977. "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance, American Finance Association, vol. 32(3), pages 663-682, June.
    5. Fama, Eugene F & French, Kenneth R, 1996. "Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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    7. Solnik, Bruno, 1993. "The performance of international asset allocation strategies using conditioning information," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 33-55, June.
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