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 .......................................................................................................................................