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INTRODUCTIONBased on the belief that 'what goes up must come down' and that investors overreact to information, contrarian strategies recommend buying past losers and selling past winners to earn significant abnormal returns. Depending upon the length of the time period used in identifying losers and winners and the subsequent investment holding period, either long-term and short-term contrarian profits may be considered. This distinction between two types of profits is important because the role of overreaction in explaining long-and short-run profits is dissimilar. DeBondt andThaler (1985 and1987) report that extreme losers over a longterm period (three to five years) outperform extreme winners over a subsequent holding period of the same length of time. The DeBondt and Thaler results have been challenged by recent papers. Zarowin (1990), for example, demonstrates that both the small firm effect and the January effect explain the abnormal returns reported by DeBondt and Thaler. Chan (1988) and Ball and Kothari (1989) show that the estimation of long-run abnormal returns is sensitive to the model and estimation methods used due to the time-varying risk of arbitrage strategies. Jegadeesh (1990) and Lehmann (1990) document empirical evidence on the success of contrarian strategies over short-term holding periods (one week or one month). Using weekly observations, Howe (1986) finds that based on large price appreciation (depreciation) over a one-week period, the winner (loser) portfolio exhibits abnormal negative (positive) returns up to one year subsequent to portfolio formation. Zarowin (1989) reports that short-term abnormal returns over a one-month period are not subsumed by size and the January phenomena. 'The authors are Professors of Finance at the University of Rhode Island. They would like to thank the participants

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

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