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Market overreaction, first observed by DeBondt and Thaler as mentioned earlier, has introduced a new area of research in finance and their ideas have greatly influenced securities selection for practitioners. Chopra et al. (1992) find that loser portfolios, formed on the basis of prior five-year returns, outperform winners by 5 to 10% per year during the subsequent five years.

Using national stock market indexes, Richards, stresses that during the first six months after portfolio formation, winners continue to outperform losers (momentum), but over the 3 and 4 years horizon, losers start to outperform winners (contrarian). DeBondt and Thaler (1985, 1987) in their study found that the stocks that performed poorly over the previous 3 to 5 years will generate higher returns over the next 3 to 5 years than the stocks that performed well during the same period. They also found that a contrarian strategy of selling past winners and holding past losers generates approximately 8 percent per year from years 3 to 5.

This study shows that contrarian strategies are more profitable over long holding period of 3 to 5 years. Trading strategies of taking long positions on losers and short positions on winners have been employed by Lehman (1990) and Park (1997). Jegadeesh (1990), Martell and Trevino (1990), Lehman (1990), Jegadeesh and Titman (1995), Antoniou, Galariotis, Spyrou (2003), Wang, Yu (2004), and have proved that reversals also exist over shorter horizons (of one week to three months).

For instance, Lehman finds that portfolios of securities that had positive returns in one week typically had negative returns in the following week, while portfolios with negative returns in one week typically had positive returns in the next week. Jegadeesh (1990) finds the same result using the monthly data from 1934 to 1987. Both of them show contrarian strategy yield abnormal returns in the very short forming period. Chopra et al. (1992) find some support for the conclusions of DeBondt and Thaler, but report that only 2.5% of the 14% return on their contrarian strategy is attributable to overreaction.

Nevertheless, evidence of overreaction has continued to emerge from different markets such as Japan (Bremer et al. (1999)) and China (Kang et al. (2002)). UK evidence on overreaction has been largely consistent with the early US study of DeBondt and Thaler (1985). Power et al. (1991) and Macdonald and Power (1991) find evidence of long-term overreaction, although only for a small sample. Another study by Clare and Thomas (1995) provides support for this evidence, but is found to be largely attributable to the size effect.

Dissanaike (1997) finds more than 50 supporting evidence for overreaction in the UK over the period 1993-2000 using FTSE 500 data. Along with these studies of long-term overreaction, very short-term overreaction has been documented by Jegadeesh (1990) and Lehmann (1990), but is now generally considered to be the product of short-term microstructure biases as argued by Kaul and Nimalendran (1990) and Lo and MacKinlay (1990).

3. Sources of Momentum

Undoubtedly, the body of research on momentum strategies has grown significantly over the past years. Momentum and contrarian trading strategies rely on compl本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。