Time-Varying Risk Premia and Profits from Portfolio Trading Strategies in the U.S. Stock Markets

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Kho, Bong-Chan
Issue Date
College of Business Administration (경영대학)
Seoul Journal of Business Vol4(1): 79~115(1998)
NYSE and AMEXGARCH ModelCAPMling-term return
This paper re-examines the profitability of two portfolio trading
strategies that are currently the most controversial in financial
research: the relative-strength strategy based on medium-term return
continuation (3 to 12 months) and the contrarian strategy based on
long-term return reversals (2 to 5 years). Using a sample of 1,500
stocks listed on the NYSE and AMEX from 1963 to 1989, the bootstrap
test result shows that large parts of the profits to the relative-strength
strategy can be explained by time-varying expected returns estimated
from a bivariate GARCH model for the conditional CAPM. This result
generally holds, even within subsamples classified by other measurees
of risk such as firm sizes and market model betas, except for the
medium- and large-size groups. However, profits to the contrarian
strategy are shown to be the most difficult to reconcile with existing
asset pricing models. The bootstrap distributions for the contrarian
profits under any null models average significantly lower profits than
the actual distributions at the 10% significance level. This indicates
that the asset pricing models are incapable of explaining long-term
mean reverting behavior of stock returns.
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College of Business Administration/Business School (경영대학/대학원)Dept. of Business Administration (경영학과)Seoul Journal of BusinessSeoul Journal of Business Volume 04, Number 1 (1998)
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