The existence of contrarian profits is a well-documented finding across various equity markets around the world. A key question, which is the focus of this research, is - why do such profits exist? Potential answers are examined in a large number of research papers, and fall into two categories: rational (i.e. there is a difference in risks characteristics of glamour and value stocks) and behavioural (i.e. the market regularly overshoots, leading to a mis-valuation of glamour and value stocks followed by a correction). However, a consensus has not been achieved so far. This research contributes to this discussion, based on the S&P 500 constituents through 1990-2013 with the use of strategies based on past returns, fundamental ratios and valuation models. I assess the following issues: whether the use of contrarian strategies can be considered as justified by the rational behaviour of a portfolio manager, whose clients may have a cheaper option to invest in a passive strategy, like an index fund or exchange traded fund (chapter 3); whether contrarian profits are mainly the product of (i) fair value revisions in response to new information or (ii) corrections to prior mis-pricing (chapter 4); whether contrarian profits are mainly the product of expected returns as imputed from the Fama and French three factor model (chapter 5). On the first point I find that an equally weighted portfolio of all constituents of S&P 500 over a particular testing period was superior to any of the tested contrarian strategies from risk/return perspective (Chapter 3). On the second point, I find that fair value revisions to new information is less important in explaining contrarian profits than corrections to prior mis-pricing when the market rebounded in 2009 (the only year where these two influences explained a significant part of the contrarian profits for most of the contrarian strategies under review) from the 2008 financial crisis (Chapter 4). On the third point, I find that rational pricing factors (both the Fama-French three factor model, and fair value revisions to new information) are more important in explaining contrarian profits than corrections to prior mis-pricing, which is mainly due to the significance of the Fama-French three factor model (Chapter 5).
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:747947 |
| Date | January 2018 |
| Creators | Kiselev, Egor |
| Publisher | Loughborough University |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | https://dspace.lboro.ac.uk/2134/33059 |
Page generated in 0.0025 seconds