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Momentum and Contrarian Stock-Market Indices

Author

Listed:
  • Jon Eggins

    (Russell Investment Group)

  • Robert J. Hill

    (School of Economics, University of New South Wales)

Abstract

We propose a new class of investable momentum and contrarian stock-market indices that partition a benchmark index, such as the Russell 1000. Our momentum indices overweight stocks that have recently outperformed, while our contrarian indices underweight these same stocks. Our index construction methodology is extremely flexible, and allows the index provider to trade-off the distinctiveness of the momentum/contrarian strategies with portfolio turnover. Momentum investment styles in particular typically entail a high level of turnover, and hence high associated transaction costs. The creation of momentum and contrarian indices and exchange traded funds (ETFs) based on our methodology would allow investors to access these styles at lower cost than is currently possible. Our indices also provide performance benchmarks for momentum/contrarian investment managers, and good proxies for a momentum factor. Over the period 1995- 2007 we find that short term momentum and long term contrarian indices outperform the reference Russell 1000 index. We also document the changing interaction between the momentum/contrarian and value/growth styles.

Suggested Citation

  • Jon Eggins & Robert J. Hill, 2008. "Momentum and Contrarian Stock-Market Indices," Discussion Papers 2008-07, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2008-07
    as

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    File URL: http://wwwdocs.fce.unsw.edu.au/economics/Research/WorkingPapers/2008_07.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Momentum index; Contrarian index; Performance measurement; Turnover; Momentum factor; Behavioral finance;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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