An Empirical Essay to Explain the Contrarian Profits in the Tunisian Stock Market: Behavioral Approach vs. Rational Approach

Abstract

This paper aims to investigate the behavioral and the rational explanations for the contrarian profits in the Tunisian stock market. We use the CAPM and the three-factor model of French (1993, 1996) to examine the rational explanations including the market risk, the size effect and the book to market effect. Behavioral explanations include the overconfidence bias and the investor sentiment. We use the decomposition of the trading volume advanced by Chuang and Lee (2006) to extract the factor reflecting the investor overconfidence and the ARMS index to measure the investor sentiment. These two variables are included in the three-factor model of French (1993, 1996) in an attempt to confront the rational approach with the behavioral approach. The results indicate that the contrarian profits on the Tunisian stock market are explained by the market risk, the size effect and the Book to Market effect; and that once adjusted for these three risk factors, they disappear. However, only the factor reflecting overconfidence among the two behavioral factors seems to play a role in explaining these abnormal returns.

Disposition Effect and Return Predictability in the Tunisian Stock Market

“…The long term reversal (for 2 years) finding seems to be robust since it holds for the three industries. This is consistent with the findings of Boussaidi (2015) in the Tunisian stock market who found that such a reversal seems to be explained by a multidimensional risk including the market risk, the firms' size and the book to market, in addition to the overconfidence bias. However, for one year horizon, only the manufacturing industry displays a return reversal, while the financial and services industries displays a momentum effect.…”