DOCSLIB.ORG

Contrarian Investment Strategies in European Markets I

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Contrarian Investment Strategies in European Markets I Contrarian investment strategies in European markets I. (Ioannis) Soukoulis Student number: 1263130 Supervisor: dr. K.K. (Korhan) Nazliben Master of Finance University of Tilburg Netherlands 2017 Acknowledgements I would like to express my sincere gratitude to the professors and staff of Tilburg University for a very productive master program. Especially the Finance department who helped me expand my horizons and introduced me to the world of Finance. It was truly a life changing experience that helped me set the foundation for what I hope is a long and prosperous career in Finance. Furthermore I would like to thank my supervisor dr. K.K. Nazliben who was extremely helpful especially since this was the first time I wrote such an extensive thesis. Above all I would like to thank my family who was very supportive and understanding during this long and arduous process. The topic of my thesis is contrarian investment strategies in European markets. Through it I achieved a greater understanding of the financial markets and I was introduced to the field of value investing and gave me the incentive to pursue this subject further. Contents 1 Introduction .................................................................................................................................. 1 1.1 Motivation ............................................................................................................................. 2 1.2 Research questions ................................................................................................................ 3 1.3 Contribution .......................................................................................................................... 3 1.4 Research Methodology and data ........................................................................................... 4 2 Literature review .......................................................................................................................... 5 2.1 Contrarian and Momentum Strategies................................................................................... 5 2.1.1 Long-term return reversal ............................................................................................... 5 2.1.2 Short term return reversals ............................................................................................. 6 2.1.3 Medium-term return continuation .................................................................................. 6 2.2 Price to Earnings ................................................................................................................... 7 2.3 Book value of equity to Market value equity ...................................................................... 10 2.4 Price to Cash flow ............................................................................................................... 13 2.5 CAPM.................................................................................................................................. 14 2.6 Efficient Markets Hypothesis .............................................................................................. 15 2.7 Asset price anomalies .......................................................................................................... 18 2.7.1 Explanation for asset pricing anomalies ....................................................................... 19 2.7.2 Higher returns as compensation for additional risk ...................................................... 19 2.7.3 Results contrary to the EMH ........................................................................................ 19 2.7.4 Higher returns due to the design of the research and data biases ................................. 20 3 Methodology and Data ............................................................................................................... 22 3.1 Research methodology ........................................................................................................ 22 3.1.1 Portfolio Analysis ............................................................................................................. 23 3.1.2 Cross-sectional regression ................................................................................................ 25 3.2 Hypothesis ........................................................................................................................... 29 3.2.1 Hypothesis test regarding variable P/E ......................................................................... 29 3.2.2 Hypothesis test regarding variable P/CF ...................................................................... 29 3.2.3 Hypothesis test regarding variable P/B ........................................................................ 30 3.2.4 Hypothesis test regarding variable SG ......................................................................... 30 3.2.5 Hypothesis test regarding variable ME ........................................................................ 31 3.3 Mean reversion .................................................................................................................... 31 3.4 Data ..................................................................................................................................... 32 4 Empirical study .......................................................................................................................... 35 4.1 Analysis of the German stock market ................................................................................. 35 4.1.1 Descriptive statistics ..................................................................................................... 35 4.1.2 Mean reversion ............................................................................................................. 35 4.1.3 Ljung-Box Q-Test......................................................................................................... 36 4.1.4 Contrarian investment strategy ..................................................................................... 39 4.1.5 Cross sectional regression ............................................................................................ 49 4.2 Analysis of the French stock market ................................................................................... 52 4.2.1 Descriptive statistics ..................................................................................................... 52 4.2.2 Mean reversion ............................................................................................................. 52 4.2.4 Ljung-Box Q-Test......................................................................................................... 53 4.2.5 Contrarian investment strategy ..................................................................................... 55 4.2.6 Cross sectional regression ............................................................................................ 63 4.3 Analysis of the Dutch stock market .................................................................................... 66 4.3.1 Descriptive statistics ..................................................................................................... 66 4.3.2 Mean reversion ............................................................................................................. 67 4.3.3 Ljung-Box Q-Test......................................................................................................... 67 4.3.4 Contrarian investment strategy ..................................................................................... 69 4.3.5 Cross sectional regression ............................................................................................ 77 5 Are Value portfolios inherently riskier? .................................................................................... 79 5.1 “Bad” states of the world .................................................................................................... 80 6 Results- Conclusions .................................................................................................................. 83 6.1 Results from the One-dimensional Portfolio analysis approach ......................................... 83 6.2 Results from the two-dimensional Portfolio analysis approach .......................................... 84 6.3 Results from the cross sectional regression......................................................................... 85 References ..................................................................................................................................... 87 Appendix A ................................................................................................................................. 100 DAX yearly composition ........................................................................................................ 100 CAC yearly composition ......................................................................................................... 101 AEX yearly composition ......................................................................................................... 103 Appendix B ................................................................................................................................. 105 Appendix C ................................................................................................................................. 108 DAX .......................................................................................................................................
Load more

Recommended publications
  • An Assessment for Existence of Contrarian and Momentum Investment Strategies in NSE
    Pacific Business Review International Volume 9 Issue 10, April 2017 An Assessment for Existence of Contrarian and Momentum Investment Strategies in NSE Dr. Falguni H. Pandya Abstract Assistant professor, The paper has attempted to document the market behavior and the Centre for Management Studies, psychology of individual decision making. The study was undertaken Dharmsinh Desai University, to investigate the possibility of overreaction for selected time interval. Nadiad, Gujarat In an attempt to study the market efficiency of NSE, it was investigated whether individuals behave in violation of Bayers' rule and such behavior affects stock prices. Based on the monthly return data of NSE, it was found that market follows contrarian investment movement and this evidence questions presence of weak form of EMH in Indian market. However, such evidence was found largely for long- term portfolio and poorly proves for medium term portfolio. For a short-term portfolio, it can be said that overreaction hypothesis is rejected. Keywords: Market, Return, Contrarian Movement Introduction The Efficient Market Hypothesis (EMH) concept coined by Fama (1969) advocate that at any given time share prices fully, fairly and rapidly reflect all historical and all new information as and when it comes. This theory is further confirmed by random walk theory which says that as share prices move in a random fashion it is impossible to earn abnormal return by predicting future share prices movement based on past prices movement. As a result, EMH says that an investor can earn only average return by using all available information. The weak-form of EMH says that the share prices reflect all historical information such as past share price movement and trading history and it is futile to study past price movement and predict future share price movement in order to outperform the market and earn abnormal return.
    [Show full text]
  • Strategies for Successful Portfolio Management
    TG§ Evidence-Based Investing Strategies for Successful Portfolio Management Executive summary: The average mutual fund investor significantly underperforms the broad financial markets indexes. Most investors would improve their long-term results, while saving both time and money, by adopting a passive index strategy based on the S&P 500 Stock Index. Index strategies have certain intrinsic challenges, especially at the asset allocation level. Diversification is a cornerstone of prudent portfolio construction. For investors seeking the potential for added performance advantage, the Dynamic Contrarian Portfolio Strategy is designed to flow funds toward underpriced asset classes at times of significant price divergence. Page | 0 (This page intentionally left blank.) Page | 1 Why do individual investors underperform? The central, practical problem of portfolio management is the fact that the typical individual investor captures only a portion of the returns available in the financial markets. Academic research consistently documents the reality of investor underperformance, though methodologies and numbers differ. For example, DALBAR, a mutual fund research firm in Boston, has for decades compiled data on the performance of investors in mutual funds. Here are the depressing results: Mutual Fund Investors vs. Indexes Annualized Returns 1996-2016 9% 7.7% 8% 7% 6% 4.8% 5.0% 5% 4% 3% 2% 1% 0.5% 0% Equity Fund S&P 500 Fixed Income Barclays Agg Investors Fund Investors Bond Index Source: DALBAR Quantitative Analysis of Investor Behavior 2017 It is not the case that the average stock mutual fund underperformed the S&P 500 Stock index by 2.9% per year over the last twenty years, but that the average investor in those funds underperformed by that large margin.
    [Show full text]
  • Contrarian Investing
    October 2010 INVESTMENT PERSPECTIVES Contrarian Investing Over the past ten to fifteen years we have discussed with our clients and written about our contrarian approach to investing on many occasions because this strategy is a core component of our decision-making process. We have chosen to review our comments on contrarian investing now because of the uncertain investment climate that we currently face. Contrarian strategies seek to take advantage of investor overreaction in the equity markets by purchasing high-quality companies when their stock prices are low. In many cases investors overvalue the future prospects of popular companies and undervalue those of out-of-favor companies. We determine value by following a very disciplined and consistent research process (see our March 31, 2007 Investment Perspective in the Library section of our Web page: http://www.hutchinsoncapital.com/research- library.html). We avoid investments in popular companies that have gained large support because frequently this popularity leads to inflated prices and excessive downside risk. If a popular company disappoints investors with lower than expected earnings, reduced sales, an accounting scandal, or for almost any reason for that matter, the price of the company often drops significantly. In essence, investors realize that the excessive valuation was unrealistic, that overly optimistic expectations will not be met, and – quite simply – they have overpaid for the “privilege” of owning stock in the company! Contrarian investing requires a combination of patience, discipline, and conviction. For example, the strong stock market performances of the late 1990’s and from 2003 through late 2007, attracted many investors who over-paid for the stocks they purchased and watched them decline significantly during the downturns that followed.
    [Show full text]
  • Master's Thesis
    DOES THE PUBLISHING OF SHORT SELL- ING INFORMATION AFFECT STOCK MAR- KET PRICES Case: Helsinki Stock Exchange Master´s Thesis -in Accounting and Finance Author: Joona Salonen Supervisors: D.Sc. Erkki Vuorenmaa M.Sc. Minna Vähäsalo 27.9.2016 Pori Turun kauppakorkeakoulu • Turku School of Economics The originality of this thesis has been checked in accordance with the University of Turku quality assurance system using the Turnitin OriginalityCheck service. Contents 1 INTRODUCTION ................................................................................................... 7 1.1 Background and motivation ........................................................................... 7 1.2 Objectives and the purpose of the study ...................................................... 10 1.3 Research methods, data and limitations ....................................................... 12 1.4 Structure of the study ................................................................................... 15 2 SHORT SELLING................................................................................................. 17 2.1 Short selling and the roles ............................................................................ 17 2.2 Risks of short selling .................................................................................... 22 2.3 Predictive and reactive short sellers ............................................................. 29 2.4 Short selling strategies ................................................................................
    [Show full text]
  • Contrarian Investing the Concept of Riskier Investment Strategies
    FINANCE UPDATES MARCH 2019 Contrarian investing The concept of riskier investment strategies. Following the latest market trends when it comes to your investment There is no guarantee that the value of your investments will grow, and strategy usually pays off, but while most stick with the safety of the you could lose them altogether in the worst-case scenario. shoal there are always a few sharks swimming against the tide. As greater returns usually come with a higher level of risk, you’ll need to Contrarian investors are the sharks in this story, inverting conventional weigh up your priorities and igure out how much risk you are willing to take. wisdom by selling when others buy, and purchasing when mainstream Ask yourself whether you would be able to stomach dramatic investors are selling. luctuations in the market, or whether it might cause too much stress. This approach assumes that people are mindlessly following each Could you handle waking up and seeing that the value of your other rather than really thinking objectively about the value of a investment has hit the loor, and hold your nerve on the assumption that given investment, leaving opportunities open to rigorously logical, it will come up again given time? unemotional lone wolves. What is the level of risk you are happy to take on without disrupting Investment guru David Dreman published a highly inluential book your other inancial goals, such as your retirement savings? called Contrarian Investment Strategy: The Psychology of Stock Your goal-setting will also play a part in determining your capacity for Market Success back in 1979, revised several times since.
    [Show full text]
  • Contrarian Investing the Concept of Riskier Investment Strategies
    FINANCE UPDATES MARCH 2019 Contrarian investing The concept of riskier investment strategies. Following the latest market trends when it comes to your investment There is no guarantee that the value of your investments will grow, and strategy usually pays off, but while most stick with the safety of the you could lose them altogether in the worst-case scenario. shoal there are always a few sharks swimming against the tide. As greater returns usually come with a higher level of risk, you’ll need to Contrarian investors are the sharks in this story, inverting conventional weigh up your priorities and igure out how much risk you are willing to take. wisdom by selling when others buy, and purchasing when mainstream Ask yourself whether you would be able to stomach dramatic investors are selling. luctuations in the market, or whether it might cause too much stress. This approach assumes that people are mindlessly following each Could you handle waking up and seeing that the value of your other rather than really thinking objectively about the value of a investment has hit the loor, and hold your nerve on the assumption that given investment, leaving opportunities open to rigorously logical, it will come up again given time? unemotional lone wolves. What is the level of risk you are happy to take on without disrupting Investment guru David Dreman published a highly inluential book your other inancial goals, such as your retirement savings? called Contrarian Investment Strategy: The Psychology of Stock Your goal-setting will also play a part in determining your capacity for Market Success back in 1979, revised several times since.
    [Show full text]
  • International Introduction to Securities & Investment (Kenya)
    Investment Operations Certificate International Introduction to Securities & Investment (Kenya) Edition 1, July 2015 This learning manual will cover examinations from 12 March 2016 until 11 March 2018 Welcome to the Chartered Institute for Securities & Investment’s International Introduction to Securities & Investment study material. This workbook has been written to prepare you for the Chartered Institute for Securities & Investment’s International Introduction to Securities & Investment examination. Published by: Chartered Institute for Securities & Investment © Chartered Institute for Securities & Investment 2016 20 Fenchurch Street London EC3M 3BY Tel: +44 20 7645 0600 Fax: +44 20 7645 0601 Email: [email protected] www.cisi.org/qualifications Author: Kevin Rothwell, Chartered MCSI Reviewers: Jonathan Beckett, Chartered MCSI Julie Harnum, MBA (FS) This is an educational manual only and the Chartered Institute for Securities & Investment accepts no responsibility for persons undertaking trading or investments in whatever form. While every effort has been made to ensure its accuracy, no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the copyright owner. Warning: any unauthorised act in relation to all or any part of the material in this publication may result in both a civil claim for damages and criminal prosecution. A learning map, which contains the full syllabus, appears at the end of this manual.
    [Show full text]
  • Contrarian Investment Philosophy in the American Stock Market on Investment Advice and the Crowd Conundrum Bondo Hansen, Kristian
    Contrarian Investment Philosophy in the American Stock Market On Investment Advice and the Crowd Conundrum Bondo Hansen, Kristian Document Version Accepted author manuscript Published in: Economy and Society DOI: 10.1080/03085147.2015.1109806 Publication date: 2015 License Unspecified Citation for published version (APA): Bondo Hansen, K. (2015). Contrarian Investment Philosophy in the American Stock Market: On Investment Advice and the Crowd Conundrum. Economy and Society, 44(4), 616-638. https://doi.org/10.1080/03085147.2015.1109806 Link to publication in CBS Research Portal General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. Take down policy If you believe that this document breaches copyright please contact us ([email protected]) providing details, and we will remove access to the work immediately and investigate your claim. Download date: 25. Sep. 2021 Contrarian Investment Philosophy in the American Stock Market: On Investment Advice and the Crowd Conundrum Kristian Bondo Hansen Journal article (Post print version) Cite: Contrarian Investment Philosophy in the American Stock Market : On Investment Advice and the Crowd Conundrum. / Bondo Hansen, Kristian. In: Economy and Society, Vol. 44, No. 4, 2015, p. 616-638. This is an Accepted Manuscript of an article published by Taylor & Francis in Economy and Society on 06 January 2016, available online: http://www.tandfonline.com/10.1080/03085147.2015.1109806 Uploaded to Research@CBS: September 2016 Contrarian Investment Philosophy in the American Stock Market: On investment advice and the crowd conundrum Abstract This paper contributes to the understanding of the role of crowds in the financial market by examining the historical origins and theoretical underpinnings of contrarian investment philosophy.
    [Show full text]
  • Contrarian Investment Strategies
    1 Introduction 1 Contrarian Investment Strategies An Assessment of the Value Premium in context to Recessions Thesis written by Rebekka Petersen & Philip Arnstedt Copenhagen Business School Finance & Strategic Management Institute of Finance Counseling by Ole Risager October 2010 Copenhagen Business School 2010 1 Introduction 2 Acknowledgements It would not have been possible to write this thesis without the help and support of the kind people around us, to only some of whom it is possible to give particular mention here. Above all, this thesis would not have been possible without the help, support and patience of our principal supervisor, Prof. Ole Risager, not to mention his advice and unsurpassed knowledge on the subject. We would also like to thank our families and friends for their personal support and great patience at all times. Their willingness to discuss topics related to our subject has been a great motivator during the process. __________________ __________________ Rebekka Petersen Philip Arnstedt Copenhagen Business School 2010 1 Introduction 3 Executive Summary Contrarian investment strategies have been present for decades, generating superior returns for the investors. Investors who follow the contrarian investment strategy are known as value investors. Value investors follow a strategy where stocks with low prices relative to book value and other measures of fundamental value are bought, to be able to generate abnormal returns. The magnitude of the value premium is huge and it has been persistent on the American stock market. We have investigated how the value premium performs in general and around recessions in order to draw conclusions on the strategy that a value investor should follow when the economy is faced with a recession.
    [Show full text]
  • Theories, Assumptions, and Securities Regulation: Market Efficiency Revisited
    THEORIES, ASSUMPTIONS, AND SECURITIES REGULATION: MARKET EFFICIENCY REVISITED DONALD C. LANGEVOORTt The efficient market hypothesis has a strong presence in the contemporary culture of securities regulation. Its central insight- that a variety of forces impound available information into stock prices fast enough that arbitrage opportunities cannot be exploited systematically'-began as an important theory in the economics literature.2 Later, it became a working tool for legal scholars, and then diffused into law as both the SEC and the courts began to cite it as authority for a variety of concepts and initiatives. Judge Frank Easterbrook was able to write in a recent opinion, without qualifica- tion, that "[t]he Securities and Exchange Commission believes that markets correctly value the securities of well-followed firms, so that new sales may rely on information that has been digested and 3 expressed in the security's price." t Lee S. and Charles A. Speir Professor of Law, Vanderbilt University. The author thanks Bill Wang, Lou Lowenstein, and Joel Seligman for their helpful suggestions. The seminal article on the efficiency hypothesis as a legal construct is RonaldJ. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficienty, 70 VA. L. REV. 549 (1984). In essence, the hypothesis posits that there will be an identity between two equilibria: securities prices and asset values. See id. at 557-58; see also William H. Beaver, Market Efficiency, 56 AccT. REv. 23, 27-33 (1981) (defining market efficiency, and identifying its attributes and associated theories). To test the equilibria hypothesis, a plausible model for asset prices must be developed and the presence of exploitable arbitrage opportunities must be explored.
    [Show full text]
  • Annotated Bibliography on the Behavioral Characteristics of U.S
    ANNOTATED BIBLIOGRAPHY ON THE BEHAVIORAL CHARACTERISTICS OF U.S. INVESTORS A Report Prepared by the Federal Research Division, Library of Congress under an Interagency Agreement with the Securities and Exchange Commission August 2010 Researcher: Seth L. Elan Project Manager: Malinda K. Goodrich Federal Research Division Library of Congress Washington, D.C. 205404840 Tel: 2027073900 Fax: 2027073920 E-Mail: [email protected] Homepage: http://loc.gov/rr/frd/ This work presents the findings of the author, based on research and analysis adhering to accepted standards of scholarly objectivity. The findings do not necessarily reflect the views of the SEC, its Commissioners, or other members of the SEC’s staff. p 62 Years of Service to the Federal Government p 1948 – 2010 Library of Congress – Federal Research Division Investor Behavior PREFACE This annotated bibliography provides 52 abstracts of a representative sample of scholarly articles on the subject of the behavioral characteristics of U.S. investors, along with a glossary defining 72 terms commonly used in the literature on this topic. The researcher conducted searches in JSTOR, EBSCO, and ProQuest, selecting for inclusion in this bibliography articles from academic journals such as American Economic Review, American Journal of Economics and Sociology, Brookings Papers on Economic Activity, CPA Journal, European Financial Management, Financial Management, Journal of Economic Perspectives, Journal of Consumer Affairs, Journal of Finance, Journal of Financial and Quantitative Analysis, Journal of Portfolio Management, Quarterly Journal of Economics, Review of Economics and Statistics, Review of Financial Studies, Stanford Law Review, and Tax Policy and the Economy. Most of the authors of these articles are university professors in the fields of economics, business, finance, psychology, sociology, and business law.
    [Show full text]
  • Contrarian Investing … Swimming Upstream by Brad Skiles, CLU®, Chfc®, CFP®, CLTC Number 13
    ECON 101 CENTER STREET PARTNERS Presents: Contrarian Investing … swimming upstream By Brad Skiles, CLU®, ChFC®, CFP®, CLTC Number 13 Perhaps the most common investment principle is: “Buy low, sell high.” Most long-term investors who have made money, have experienced this axiom (generally, you can’t make money unless the current price is higher than the original purchase).1 As simple as it sounds, many people don’t understand this principle. Let’s dig deeper. Buying Low Doesn’t Feel Good If an investment is “low,” that generally means there are more sellers than buyers. Markets are based on supply and demand. An over-supply and a weak-demand, result in a lower price. But why are there more sellers? “Fear” is the emotion often used to describe market bottoms. The fear that more money could be lost on this investment, drives people to liquidate the investment. Like screaming “fire” in a theater (don’t do it!), mass psychology takes place. In the investment community, this is called, “capitulation.” Investopedia.com defines capitulation as: “When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.”2 It shouldn’t be too difficult to remember the emotions connected to the market bottom of March 6, 2009. The Dow Jones Industrial Index3 touched 6,443, a 54% decline from its October 2007 high.4 A lot of uncertainty existed. Many investors were discouraged with the housing market, the banking system, and the government.
    [Show full text]