The Sophisticated and the Simple: The Profitability of Contrarian Strategies
54 Pages Posted: 26 Oct 2008
There are 2 versions of this paper
The Sophisticated and the Simple: The Profitability of Contrarian Strategies
The Sophisticated and the Simple: The Profitability of Contrarian Strategies
Date Written: October 21, 2008
Abstract
A variety of variables have been used to form contrarian portfolios, ranging from relatively simple measures, like book-to-market, cash flow-to-price, earnings-to-price and past returns, to more sophisticated measures based on the Ohlson model and residual income model (RIM). This paper investigates whether: (i) contrarian strategies based on RIM perform better or worse than those based on the Ohlson model; (ii) contrarian strategies based on more sophisticated valuation models (e.g. Ohlson and RIM) perform much better than the relatively simpler ranking variables that have been used so extensively in the finance literature. Given that the RIM and Ohlson models require greater information inputs and technical know-how, and make different implicit assumptions on future abnormal earnings, it is important to ascertain if they offer significantly greater contrarian profits to outweigh the increased costs that they entail. Indeed, our surprising finding is that simple cash flow-to-price measures appear to do almost as well as the more sophisticated alternatives. One would have expected the sophisticated models to significantly outperform the simple cash flow-to-price model for the reasons given by Penman (2007).
Keywords: Capital markets, Valuation, Market efficiency
JEL Classification: M41, G12, G14
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Sophisticated and the Simple: The Profitability of Contrarian Strategies
By Gishan Dissanaike and Kim-hwa Lim
-
The Validity of the Economic Value Added Approach: An Empirical Application
-
More than Just Contrarians: Insider Trading in Glamour and Value Firms
By Alan Gregory, Rajesh Tharyan, ...
-
Economic Value Added (R) - Application to Portuguese Public Companies
-
Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK
By Alan Gregory, Rajesh Tharyan, ...
-
Long-Term Return Reversals –Value and Growth or Tax? UK Evidence
By Yuliang Wu and Youwei Li