A multivariate analysis of the contrarian investment strategy in the Japanese stock market

The purpose of this thesis is to examine recent behavior of the Japanese stock market from 1975 through 1995. The goal of this study is to provide insight into the particular behaviors observed and document possible explanations in light of the work presented. Specific contributions are listed below. (1) We discuss the current research on the Japanese stock market, contrarian investment strategies, the relationship of financial variables to stock returns, and size adjustment procedures. (2) We extend the study of Chang, McLeavey, and Rhee (1995) on the Japanese stock market through 1995. Their original study spanned the 17 year period between 1975 and 1991 and documented empirical evidence on the short-term profitability of a contrarian investment strategy in the Japanese stock market. We investigate a longer time horizon of 21 years, between 1975 and 1995, and determine if the short-term profitability still exists after the recent bear market. (3) We investigate a comprehensive size adjustment procedure documented by Chopra, Lakonishok, and Ritter (1992) that purges stocks that are in the extreme portfolios (winners and losers) before forming the size match deciles. Past research has documented significant relationships between size and stock returns. This technique is used to prevent the possibility of overadjusting for size and not detecting an overreaction effect. (4) We explore the development and usage of a new size adjustment procedure based on regression. We compare the results to the variation of the size matched decile technique developed by Dimson and Marsh (1986) and utilized by Chang, McLeavey, and Rhee (1995) in their study of the Japanese stock market. We further explore the new size adjustment technique based on regression incorporating the purging technique utilized by Chopra, Lakonishok, and Ritter (1992). (5) We investigate a particular contrarian investment strategy on the Japanese stock market and perform a multivariate analysis to determine whether financial data can be utilized to explain the short-term profitability of this contrarian investment strategy. (6) Finally, we provide a research summary and present recommendations for further study and research.