Momentum and Contrarian Trading Strategies: Implication for Risk-sharing and Informational Efficiency of Security Markets
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This thesis investigates the profitability of the Momentum and Contrarian strategies in international equity markets. In particular, I introduce for the first time the use of countries’ indices performance to momentum and contrarian portfolio selection. I show that investors can switch back and forth from one country to the other in designing worldwide strategies. The global momentum strategy is consistently profitable between 1969 and 2014. The most successful momentum strategy selects stocks based on their previous performances over 9 months and then holds the portfolio for the next 3 months. This strategy yields 3% per month (42.57% per year). Interestingly, countries’ indices’ portfolios formed based on prior 48 months; prior losers outperform prior winners by 0.83% per month (10.40% per year) during the subsequent 60 months. The reversal effect is substantially stronger for emerging countries where it yields 1.37% per month (17.70% per year). It remains profitable in the period post-globalization. In addition, I examine for the first time the role of world risks factors in explaining the global momentum and contrarian profits and find that the global momentum strategies obtain significant abnormal returns after adjusting consecutively for world Fama and French risks (0.9% per month or 11.35% per year), and world market states risks (1.31% per month or 16.76% year). Of particular interest, I find a strong relation between world macroeconomic risks factors, notably world industrial production and the momentum return. Second, I find no substantial relation between world risks factors and the contrarian profit. These results suggest that excess return can be earned in the long run by using global investment strategies based on historical prices, challenging the weak form of the Efficient Market Hypothesis. In Chapter 1, I explain the momentum and the contrarian strategies, motivate the importance of what I propose as global momentum and contrarian strategies, and present the results obtained. In chapter 2, I review the Efficient Market Hypothesis’ literatures in conformity with the Standard Finance theory. Additionally, I review the Behavioural Finance literatures with a focus on the psychology of investor decision, and the stock market under-reaction and overreaction approach of explaining the momentum and contrarian profitability. In chapter 3, I explain in details the main methodologies used to examine the global momentum and contrarian strategies profitability, and motivate the dataset used. In Chapter 4, I examine the new global momentum strategy profitability internationally. In Chapter 5, I examine the new contrarian strategy profitability internationally. In Chapter 6 I examine the role of global risks factors in explaining the momentum and contrarian profits. Finally, in Chapter 7 I conclude and highlights the limitations of the thesis.
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