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Evolution of short-term contrarian profits

Author

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  • Xuebing Yang
  • Huilan Zhang

Abstract

Purpose - The purpose of this paper is to study the US stock market and try to explain why short-term contrarian profits have largely disappeared in the past two decades. Design/methodology/approach - In this work, the authors decompose the short-term contrarian profits into cross-sectional variations, firm-level overreactions and lead-lag effects to study the changes in their shares. Then, the authors study the behavior of the subgroups in the winner and loser subportfolios of contrarian investment strategies. Findings - The authors find that short-term contrarian profits have largely vanished since 2000. Changes in the shares of the three components of contrarian profits, which are cross-sectional variations, firm-level overreactions and lead-lag effects, are not the main reason for the disappearance of contrarian profits in the past two decades. Instead, the disappearance of short-term contrarian profits is primarily due to the heterogeneous evolution of subgroups in the portfolio, which leads to a decrease in the overall level of overreactions that drive the contrarian profit. Originality/value - The work explains the disappearance of short-term contrarian profits in the US stock market.

Suggested Citation

  • Xuebing Yang & Huilan Zhang, 2023. "Evolution of short-term contrarian profits," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 41(1), pages 1-27, July.
    • Handle: RePEc:eme:sefpps:sef-12-2022-0599
    DOI: 10.1108/SEF-12-2022-0599
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    References listed on IDEAS

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