A Review of Contrarian Strategies in Capital Markets

A contrarian stock selection strategy consists of buying stocks that have been losers and selling short stocks that have been winners. The strategy is formulated on the premise that the stock market overreacts to news, so winners tend to be overvalued and losers undervalued. Many investment strategies, such as those based on the price/earnings ratio, or the book/market ratio, can be regarded as variants of this strategy. The purpose of this paper has been review the empirical evidences of contrarian investment strategies in capital markets in developed and developing economies. The empirical results reviewed in literature indicated that contrarian investment strategies yielded superior performance in stock markets across the world and the success of the strategy can be attributed to either risk or behavioral based explanations. The superior performance of the strategy has been proved on several markets. Evidences for the failure of the contrarian investment strategies were also found and some studies revealed negative results.