A.G. MalliarisLoyola University Chicago

Multinational Finance Society MeetingsRome, Italy, June 26-29, 2011

Contrarian and Momentum Strategies:

The Impact of the Business Cycle

Discussion

Purpose of the Paper

• Revisit and extend previous work regarding momentum and contrarian strategies

• There exists a large literature on these topics developed during the last 20 years

• Buy stocks based on superior past six-month returns and hold them for following six months to obtain significant positive returns

More Past Results

• The market responds slowly to new information

• Underreaction of stock prices to news such as earnings announcements, but an overreaction of stock prices to a series of good or bad news.

• Momentum strategies disappear once stock returns are adjusted for their predictability based on certain macroeconomic variables

Few More Results

• Profitability of momentum strategies is influenced by bull and bear markets.

• Firm size, transactions costs, analysts’ forecasts and global dimensions also play important role.

• Contrarian strategies often are successful because of overconfidence of both traders and shareholders.

What is Needed

• Is there a Unified Story?

• Are Momentum and Contrarian separate or integrated?

• How can we Develop a Comprehensive Framework?

Sample and Methodology

• CRSP data from January 1972 to December 2009

• Raw Contrarian and Momentum Profits• Profits Related to Business Cycles• Related to Firm Size and Business Cycle• Add Firm Size and Analysts’ Forecasts• Impressive Amount of Work

Findings

• Confirm that contrarian and momentum strategies still yield a significant return on average.

• Most of the contrarian profits are realized in January, while most of the momentum profits are realized in non-January months.

• Contrarian strategies, while only marginally successful during expansionary periods, produce a statistically significant returns during contractionary periods

More Findings

• Momentum strategies yield statistically significant returns during expansionary periods.

• Choose small stocks for contrarian strategy and large stocks for momentum strategy.

• These strategies are more successful with stocks with lower residual analyst coverage.

More Results

• Firm size seems to dominate the effect of analyst coverage.

• Contrarian strategies proves to be a more profitable after extreme market movements either up or down.

Evaluation

• Excellent paper; good biblio; good methodology; ambitious agenda; bold and unifying

• Booms and busts very critical• Firm size also important• We still do not have a comprehensive theory• In-sample vs. out-of-sample testing• What are the enduring strategies?• How do derivative markets behave?