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Efficient Market Hypothesis and the Contrarian Trading Paradox

Efficient Market Hypothesis and the Contrarian Trading Paradox The investments industry is made up of two major groups of security analysts fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's fundamentals, which are risk and performance factors specific to that firm. Technicians, on the other hand, believe that patterns in historical price and volume data for a stock can be used to make profitable trading decisions. In keeping with the latter approach, DeBondt and Thaler 1985, 1987 find evidence of price reversals in threeyear stock returns. Specifically, they determine that stock prices overreact to information, suggesting that a contrarian strategy of buying stocks that performed poorly in the past i.e. losers and selling stocks that performed well in the past i.e. winners, produces significant abnormal returns. Additional support to this overreaction phenomenon is documented by Chan 1988, Lo and MacKinlay 1990, and Zarowin 1990. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Management Research News Emerald Publishing

Efficient Market Hypothesis and the Contrarian Trading Paradox

Pat Obi, C.; Sil, Shomir
Management Research News , Volume 19 (11): 6 – Nov 1, 1996
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References (9)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0140-9174
DOI
10.1108/eb028507
Publisher site
See Article on Publisher Site

Abstract

The investments industry is made up of two major groups of security analysts fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's fundamentals, which are risk and performance factors specific to that firm. Technicians, on the other hand, believe that patterns in historical price and volume data for a stock can be used to make profitable trading decisions. In keeping with the latter approach, DeBondt and Thaler 1985, 1987 find evidence of price reversals in threeyear stock returns. Specifically, they determine that stock prices overreact to information, suggesting that a contrarian strategy of buying stocks that performed poorly in the past i.e. losers and selling stocks that performed well in the past i.e. winners, produces significant abnormal returns. Additional support to this overreaction phenomenon is documented by Chan 1988, Lo and MacKinlay 1990, and Zarowin 1990.

Journal

Management Research News – Emerald Publishing

Published: Nov 1, 1996

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