Presence and Sources of Contrarian Profits in the Bangladesh Stock Market

Abstract

This article, using weekly data for the period 2002 through 2013, investigates the presence of both contrarian and momentum profits and their sources in the Bangladesh stock market. It follows the methodology of Lo and MacKinlay ( Review of Financial Studies, 1990, 3(2), 175–205) to form portfolios with a weighted relative strength scheme (WRSS). The methodology of Jegadeesh and Titman ( Review of Financial Studies, 1995, 8(4), 973–993) is used to decompose the contrarian/momentum profits into three elements: compensation for cross-sectional risk, lead–lag effect in time series with respect to the common factor and the time-series pattern of stock returns. Results provide the evidence of significant contrarian profits for the holding period of one through eight weeks. There is a stronger presence of contrarian profits during 2002–2008 sub-period. The time-series pattern is found to be the main source of contrarian profits, suggesting that idiosyncratic (firm-specific) information is the main contributor to contrarian profits. Interestingly, the influence of idiosyncratic information on such profits has gradually decreased since 2008. Contrarian profits are robust to market sentiment and other systematic risk factors.