Contrarian Investment Strategies in a European Context

Abstract

INTRODUCTIONIn finance literature, a number of stock market anomalies have been documented. Banz (1981) found that smaller firms produce higher stock returns than can be expected from the Capital Asset Pricing Model (CAPM). Basu (1977 and1983) and Reinganum (1981) documented a negative relation between price/earnings (P/E) ratios and CAPM predicted returns. Another well-known stock market anomaly is the overreaction effect found by De Bondt andThaler (1985 and1987). Besides that, also seasonal effects have been found in stock market returns. Hawawini and Keim (1995) give an extensive overview of these anomalies.Some of the anomalies fall under the general category of contrarian investment strategies. According to Chan (1988) a contrarian stock selection strategy consists of buying stocks that have been losers and selling stocks that have been winners. The reason for the attractiveness of these strategies is grounded in psychology. Kahneman and Tversky (1982), in a study on experimental psychology, find that people tend to overreact to unexpected and dramatic events. De Bondt and Thaler (1985) apply this result to the stock market and find that it is possible to earn excess returns by investing in stocks that have done extremely poorly in past years. Recently another variant of the contrarian strategy has received much attention, i.e. the outperformance of value strategies. These strategies, which were already advocated by Graham and Dodd in 1934, call for buying stocks with low prices relative to value measures such as earnings, cash flows, book values or dividend yields. Studies for the United States and Japan have shown that value strategies produce superior returns. In this paper we will show that this is also the case for four

More than Just Contrarians: Insider Trading in Glamour and Value Firms

“…Although the correlations are significant, they clearly indicate considerable variation between value categories, hence justifying a concern with alternative specifications of value classification. It is also worth noting that the correlations are very much in line with those reported by Brouwer et al (1997Brouwer et al ( : p.1360 Table 3) and Gregory et al (2001Gregory et al ( : p. 1226 table A1). 17 An interesting issue arises if we wish to evaluate the returns to directors' trades over and above those accruing to a simple value-glamour strategy.…”

“…5 Fama and French (1998) show that the value premium is a truly international phenomenon. The value effect has been observed in Japan (Chan et al 1991), in European countries (Capaul et al, 1993;Brouwer et al, 1997;Forner and Marhuenda, 2003;Antoniou et al, 2005), and in the UK Levis and Liodakis, 2001;Gregory et al, 2001;, Dimson et al, 2003;Dissanaike and Lim, 2010). on cash flow measures are not far behind. As the authors conclude (p. 251) 'Our most intriguing finding is that simple cash flow multiples appear to have almost as much power in predicting future contrarian profits as the more sophisticated alternatives'.…”

Short-horizon contrarian and momentum strategies in Asian markets: An integrated analysis

“…Bowman and Iverson (1998) also document the weekly price reversals in New Zealand during the period between 1967 and 1986 where contrarian profits are robust in relation to risk, size, and bid-ask bounce effects. Empirical studies done on other individual markets such as the UK, Greece, Germany, and others are also provided by several researchers (see Brouwer, Van Der Put, & Veld, 1997;Chan & Hameed, 2000;Dissanaike, 2002;Gregory, Harris, & Michou, 2001;Schiereck, De Bondt, & Weber, 1999;Scott, Stumpp, & Xu, 2003;Weimin, & Strong, 1999).…”

Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence

“…Even in long-run studies, such as Jaffe, Keim and Westerfield (1989) for the period 1951 to 1986, there appears to be a strong negative relationship between PE and abnormal returns. In an international study of France, Germany, the Netherlands and the UK, Brouwer et al (1996) found that a portfolio of companies with the lowest PE values outperformed one with the highest PE values by 5%. The studies above show that the share price performances of low and high PE ratio companies are very different.…”