Size, Changing Risk and Seasonality Effects in the Australian Share Market

The over-reaction hypothesis suggests that if investors over-react then a contrarian strategy of buying losers and selling winners, should earn significant abnormal returns. In an Australian study from 1980 to 1997 it is found that there is an inverse relationship between size and observed returns in the Australian market and that change in risk between the formation and test period is insignificant in terms of the over-reaction paradigm. Finally, it is shown that winner portfolios earn considerable returns in January whilst losers earn the bulk of their returns in the non-January months