On the Contrarian Investment Strategy

Abstract

Recent research has found an abnormal return on the strategy of buying lo sers and selling winners in the stock market, a finding sometimes int erpreted as support for the market overreaction hypothesis. This arti cle explores an alternative interpretation of this evidence. The auth or finds that the risks of losers and winners are not constant. The e stimation of the return of this strategy is, therefore, sensitive to the methods used. When risk changes are controlled for, only small ab normal returns are found. The model of risk and return used in the pa per is the standard capital asset pricing model. Copyright 1988 by the University of Chicago.