Short-term contrarian investing: is it profitable? … Yes and No

In this paper we investigate short-term contrarian investment strategies in the Australian stock market using weekly data of those stocks comprising the All Ordinaries Index during the period 1994–2001. We find both the (Rev. Financ. Stud. 3 (1990) 175) equal-weighted strategy and a new value-weighted strategy yield statistically significant short-term contrarian profits. Importantly, these observed profits could not be fully explained by measurement errors such as bid–ask bounce or by risk, seasonality or volume. Profits are largely related to firm size with overreaction to firm specific information being the primary source of short-term contrarian profits in Australia. However, when a ‘practical’ short-term contrarian strategy including reasonable transaction costs is implemented, all profits vanish. Thus, while the contrarian approach is not viable as a stand-alone strategy, we argue that it may in fact be value-enhancing when employed as an overlay strategy, particularly in the context of managed funds.