Performance of the Contrarian Strategy after Extreme Market Movements

Abstract

In this article, we use detailed event study methodology to test the performance of the contrarian strategy after extreme market movements. Our results indicate that the contrarian strategy is profitable after extreme market movements, regardless of the location in the business cycle. In addition, the contrarian strategy return is larger after extreme market upward movements than extreme market downward movements. The returns earned via contrarian strategy are both economically and statistically significant after controlling for the impact of transaction costs, the January effect, and multiple systematic factors.

TOPICS: Portfolio construction, portfolio theory