TY  - JOUR
AU  - Lo,Andrew W.
AU  - MacKinlay,A. Craig
TI  - When are Contrarian Profits Due to Stock Market Overreaction?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2977
PY  - 1991
Y2  - February 1991
UR  - http://www.nber.org/papers/w2977
L1  - http://www.nber.org/papers/w2977.pdf
N1  - Author contact info:
Andrew W. Lo
MIT Sloan School of Management
100 Main Street, E62-618
Cambridge, MA  02142
Tel: 617/253-0920
Fax: 781/891-9783
E-Mail: alo@mit.edu

A. Craig MacKinlay
Department of Finance, Wharton School
University of Pennsylvania, Steinberg-Dietrich Hal
3620 Locust Walk
Philadelphia, PA  19104-6367
Tel: 215/898-5309
Fax: 215/898-6200
E-Mail: MACKINLAY@WHARTON.UPENN.EDU
AB  - The profitability of contrarian investment strategies need not be the result of stock market overreaction. Even if returns on individual securities are temporally independent, portfolio strategies that attempt to exploit return reversals may still earn positive expected profits. This is due to the effects of cross-autocovariances from which contrarian strategies inadvertently benefit. We provide an informal taxonomy of return-generating processes that yield positive [and negative] expected profits under a particular contrarian portfolio strategy, and use this taxonomy to reconcile the empirical findings of weak negative autocorrelation for returns on individual stocks with the strong positive autocorrelation of portfolio returns. We present empirical evidence against overreaction as the primary source of contrarian profits, and show the presence of important lead-lag relations across securities.
ER  -