A Study of Momentum and Contrarian Phenomena in US Market

Abstract

Paper studies the Momentum and mean reversion phenomena in the US markets. On the basis of listing in S&P 100 index, 100 stocks are undertaken for analysis. CLHL ratio helps to identify the stocks for the formation of the desired portfolios. CLHL ratio is calculated on the basis of closing price, low price, and high price data of the stocks. The data considered was past 1, 3 and 5 days. Daily portfolio returns were calculated. It is found that portfolios formed on the basis of momentum strategy have significant returns generated in both the short and long terms, however the returns were negative across all tenure periods; portfolios built on the basis of contrarian strategy were able to generate significant returns from one year itself. Study also finds that the higher number of stocks in the portfolio actually decreases the returns generated in contrarian strategy. It is also found that the highest returns are generated when the stocks are selected on the basis of one previous day information rather than longer historical information. This does reflect the strong form of the market efficiency.

Keywords: Momentum, Contrarian, Mean reversion, Portfolio performance

JEL Classification: G11