The Choice Between Contrarian And Momentum Strategies

I presente vidence of predictability in different samples constructed to minimize concerns about time-varying risk premia and Market microstructure effects. I use filter rules on lagged return and turnover rate to uncover weekly over-reaction profits on different samples of securities. The largest reversals and the potential contrarian trading strategy profits occur in high turnover stocks,as the price pressures caused by non-informational demands for immediacy are accommodated.I find that winner portfolio of low turnover rate stocks experience greater momentum profit.portfolio of high turnover rate exhibit weaker reversals. We also document that contrarian portfolios earn returns as high as10.19%per season for300large capitalization companies and just3.35%for all equities and5.53%for all normal tranction equities. We find that lagged return has only a limited ability to explain contrarian profits.the filter strategies suggests that an investor who pursues the filter strategy with relatively low transaction costs will strongly outperformance investor who follows a buy-and-hold strategy.