Efficient Market Hypothesis and the Contrarian Trading Paradox

The investments industry is made up of two major groups of security analysts: fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's "fundamentals," which are risk and performance factors specific to that firm. Technicians, on the other han...

Full description

Saved in:
Bibliographic Details
Published in:Management research news 1996-11, Vol.19 (11), p.73-78
Main Authors: Pat Obi, C, Sil, Shomir
Format: Article
Language:English
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The investments industry is made up of two major groups of security analysts: fundamentalists and technicians. Fundamentalists make investment decisions by analysing a company's "fundamentals," which are risk and performance factors specific to that firm. Technicians, on the other hand, believe that patterns in historical price and volume data for a stock can be used to make profitable trading decisions. In keeping with the latter approach, DeBondt and Thaler (1985, 1987) find evidence of price reversals in three-year stock returns. Specifically, they determine that stock prices overreact to information, suggesting that a contrarian strategy of buying stocks that performed poorly in the past (i.e. losers) and selling stocks that performed well in the past (i.e. winners), produces significant abnormal returns. Additional support to this "overreaction phenomenon" is documented by Chan (1988), Lo and MacKinlay (1990), and Zarowin (1990).
ISSN:0140-9174
1758-6135
DOI:10.1108/eb028507