Evolution of short-term contrarian profits

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.

Citation

Yang, X. and Zhang, H. (2024), "Evolution of short-term contrarian profits", Studies in Economics and Finance, Vol. 41 No. 1, pp. 1-27. https://doi.org/10.1108/SEF-12-2022-0599