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Short‐term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?

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  • Antonios Antoniou
  • Emilios C. Galariotis
  • Spyros I. Spyrou

Abstract

This paper provides evidence on short‐term contrarian profits and their sources for the London Stock Exchange. Profits are decomposed to sources due to factors derived from the Fama and French (1996) three‐factor model. For the empirical testing, size‐sorted sub‐samples are used, and adjustments for infrequent trading and bid‐ask biases are also made. Results indicate that UK short‐term contrarian strategies are profitable and more pronounced for extreme market capitalization stocks. These profits persist even when the sample is adjusted for market frictions, risk, seasonality, and irrespective of whether equally‐weighted or value‐weighted portfolios are employed. The most important factor that drives contrarian profits appears to be investor overreaction to firm‐specific information.

Suggested Citation

  • Antonios Antoniou & Emilios C. Galariotis & Spyros I. Spyrou, 2006. "Short‐term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 839-867, June.
    • Handle: RePEc:bla:jbfnac:v:33:y:2006:i:5-6:p:839-867
    DOI: 10.1111/j.1468-5957.2006.00003.x
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    1. Antonios Antoniou & Emilios Galariotis & Spyros Spyrou, 2006. "The effect of time-varying risk on the profitability of contrarian investment strategies in a thinly traded market: a Kalman filter approach," Applied Financial Economics, Taylor & Francis Journals, vol. 16(18), pages 1317-1329.
    2. Stefanescu, Razvan & Dumitriu, Ramona & Nistor, Costel, 2012. "Short term momentum and contrarian profits on the Bucharest Stock Exchange before and during the global crisis," MPRA Paper 42510, University Library of Munich, Germany, revised 18 Sep 2012.
    3. Emilios C. C Galariotis, 2010. "What should investors know about the stability of momentum investing and its riskiness? The case of the Australian Security Exchange," Post-Print hal-00917587, HAL.
    4. Galariotis, Emilios C., 2010. "What should we know about momentum investing? The case of the Australian Security Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 18(4), pages 369-389, September.
    5. John Cotter & Niall McGeever, 2018. "Are equity market anomalies disappearing? Evidence from the U.K," Working Papers 201804, Geary Institute, University College Dublin.
    6. Galariotis, Emilios C. & Holmes, Phil & Ma, Xiaodong S., 2007. "Contrarian and momentum profitability revisited: Evidence from the London Stock Exchange 1964-2005," Journal of Multinational Financial Management, Elsevier, vol. 17(5), pages 432-447, December.
    7. Michou, Maria & Mouselli, Sulaiman & Stark, Andrew, 2014. "On the differences in measuring SMB and HML in the UK – Do they matter?," The British Accounting Review, Elsevier, vol. 46(3), pages 281-294.

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