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Profitability of Short-Term Contrarian Strategies: Implications for Market Efficiency

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  • Conrad, Jennifer
  • Gultekin, Mustafa N
  • Kaul, Gautam
Abstract
In recent years, several researchers have argued that the stock market consistently overreacts to new information, which, in turn, results in price reversals. B. N. Lehmann (1990) and others showed that a contrarian can make substantial profits in the short run by simply buying losers and selling winners. The authors, however, demonstrate that these profits are largely generated by the bid-ask bounce in transaction prices; accounting for this 'bounce' by using bid prices eliminates all profits from price reversals for NASDAQ-NMS stocks and most of the profits for NYSE/AMEX stocks. Moreover, any remaining profits (regardless of their source) disappear at trivial levels of transaction costs.

Suggested Citation

  • Conrad, Jennifer & Gultekin, Mustafa N & Kaul, Gautam, 1997. "Profitability of Short-Term Contrarian Strategies: Implications for Market Efficiency," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 379-386, July.
    • Handle: RePEc:bes:jnlbes:v:15:y:1997:i:3:p:379-86
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