A Further Re-Examination of the Contrarian Investment Strategy: Evidence from Multivariate Tests

This paper investigates the performance of the contrarian investment strategy using the CAPM and APT. The results from multivariate tests of structural changes based on the CAPM show that the systematic risks of contrarian portfolios are not stable over time. In addition, the mean-variance efficiency of two market indexes, equal-weighted and value-weighted, cannot be rejected. This confirms Chan's (1988) findings that the abnormal returns documented in previous studies can be attributed to changes in systematic risks of the contrarian stocks. Using the asymptotic principal components technique to extract the APT factors and subsequently running regressions of contrarian stock returns on those factors, we find that the APT models explain the returns of contrarian stocks very well. The empirical results suggest that the contrarian investment strategy does not outperform the market, and the CAPM and the APT work equally well in evaluating the contrarian performance.