A.G. Malliaris Loyola University Chicago Multinational Finance Society Meetings Rome, 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?