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Global Investment Management Contrarian & Momentum Strategies in Japan Amitabh Agrawal Karim Fahim Bernard Muller Shawn Ramsey Jason Takata Agenda • Background • Research Objectives • Data Set • Methodology • Results • Conclusion Background • Definitions – Contrarian: • Investors buy stocks that have performed poorly and sell stock that have performed well. – Momentum: • Investors buy stocks that are rising in value with the anticipation of earnings acceleration. Background • Key research findings: – In the USA: • From 1926 to 1982, “loser” portfolios outperformed the market by 19.6% after 36 months while “winner” portfolios earned 5% less than market (De Bondt and Thaler). • “Value” stocks outperformed “glamour” stocks on the NYSE and AMEX from 1968 to 1989 for 1 and 5 year horizons (Lakonishok, Shleifer, and Vishny). Background • Key research findings: – In Germany: • For a 5 year term, both momentum and contrarian strategies outperformed the market. On a shorter term, contrarian strategies underperformed the market (Schiereck, De Bondt, and Weber). – In the UK: • “Value” portfolios gave greater returns than the market as they tend to react sharply to good surprises and mildly to bad ones (Levis and Liodakis). Background • Key research findings: – In Taiwan: • Contrarian strategies did not offer same results as in the US, and only provided marginal excess returns (Yang). – In Japan: • Abnormal returns for contrarian strategies were observed in the Japanese market (Chang, McLeavy, and Rhee). Research Objectives • Evaluate the merits of momentum and contrarian strategies in the Japanese market. • Determine whether holding period influences the results. Data Set • • • • Japanese market Sample period – Jan 1994 to Jan 2004 Source – Datastream Data for 3784 securities • Some securities did not exist for the duration of the sample period and there may be a survivorship bias. • Some stocks suffered from illiquidity and small cap effect which may impede real life implementation. Data Set Japan Nikkei Index 1994-2004 21,000 19,000 Level 17,000 15,000 13,000 11,000 9,000 7,000 5,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Data Set Nikkei vs S&P 500 and Hang Seng Nikkei 225 (-47%) S&P 500 (+135%) 4/1/04 4/1/03 4/1/02 4/1/01 4/1/00 4/1/99 4/1/98 4/1/97 4/1/96 4/1/95 4/1/94 Hang Seng (+11%) Methodology • Yearly returns calculated for each stock • All stocks sorted based on returns • Top and bottom deciles used to form “winner” and “loser” portfolios • Equal security weights in the portfolios • Portfolio returns calculated for 1 year, 3 year, and 5 year holding periods Methodology • Conducted t-tests for the difference in mean loser and winner returns • t-test for returns being different from zero • Used Sharpe ratio to evaluate returns with level of risk Results • Summary of findings: 1 Year Return 1 Year 3 Year Variance Return 3 Year 5 Year Variance Return Winner Portfolio 3.75% 20.45% -21.56% 10.50% -6.38% 10.54% Loser Portfolio 11.44% 18.83% -3.94% 3.53% 12.41% 10.92% 5 Year Variance Results 1 year 3 year 5 year Full Sample Winner 3.75% -21.75% -8.23% Loser 11.44% -4.20% 2.11% Difference (W-L) -7.69% -17.56% -10.35% 7.57% -13.29% 2.19% Loser 16.90% 10.77% -0.75% Difference (W-L) -9.33% -24.05% 2.94% Winner 5.89% -20.99% -5.78% Loser 9.02% -6.93% -4.99% -3.13% -14.06% -0.79% Small Sub Sample Winner Large Sub Sample Difference (W-L) Results • Winner and loser portfolio returns were statistically different from each other and different from zero • 1 yr return - t-tests significant in most periods • 3 & 5 yr returns – slightly less so Results Sharpe ratios • The majority of periods had negative returns – therefore negative Sharpe ratios • Sharpe ratios ranged from – 0.73 to +0.73 • Results somewhat ambiguous Conclusion The results obtained in our study indicate the evidence that the contrarian strategy generated superior returns for the Japanese equity market for the 1994 2003 period Thank you