An analysis of momentum and contrarian anomalies using an orthogonal portfolio approach

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Abstract

We use a latent factor approach to investigate if the momentum and contrarian profits, observed in the US stock market, should be considered as risk premiums or have nonrisk-based explanations. The model is also employed as a benchmark to assess the explanatory power of the traditional asset-pricing models in this context. Our findings show that the profits of the long-run contrarian strategy are related to some other background risk factors, whereas the momentum and the short-run contrarian profits are mostly nonrisk based. The latter finding mainly supports investors' behavioural irrationality as an explanation of these anomalies.

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  • Economics
Original languageEnglish
Pages (from-to)625-628
JournalApplied Economics Letters
Volume16
Issue number6
Publication statusPublished - 2009
Publication categoryResearch
Peer-reviewedYes