When are Contrarian Profits Due to Stock Market Overaction?

Author(s): Andrew W.Lo, A.Craig MacKinlay

Abstract: If returns on some stocks systematically lead or lag those of others, a portfolio strategy that sells "winners" and "losers" can produce positive expected returns ,even if no stock's returns are negatively autocorrelated as virrually all models of overreaction imply.Using a particular contrarian strategy we show that, despite negative autocorrelation in indivadual stock returns ,weekly portrolio returns are strongly positively autocorrelated and are the result of important cross-autocorrelations.we find that the returns of large stocks lead those of smaller stocks,and present evidence against overreaction as the only source of contrarian profits.

Lo and Makinlay 90.pdf