Contrarian and Momentum Investment Strategies in Pakistan Stock Exchange

Jalal Shah, Attaullah Shah


This study examines several aspects of the momentum
strategies, such as profitability, risk-based explanation, and
decomposition of the momentum profits. For this purpose, we use weekly
and monthly data of 581 firms listed at the Pakistan Stock Exchange
(PSX) for the period 2004-2014. We found the presence of momentum
profits over short and long-horizons, while majority of the contrarian
profits were observed only in the presence of penny stocks that have
share prices of PKR 10 or less. As a robustness check, we computed
returns through the weighted relative strength scheme (WRSS) procedure
and average cumulative abnormal returns (ACARs). Interestingly, the
results reported through WRSS have shown a similar pattern to that
obtained through average cumulative abnormal returns (ACARs). Further,
to know which factor contributes more to momentum and contrarian
profits, we used the model proposed by Lo and MacKinlay (1990). Our
findings show that the overreaction effect is the largest contributing
factor of contrarian profits in PSX, while cross-sectional risk is the
second largest factor and negatively affects the contrarian profits.
Moreover, the lead-lag effect contributes positively to the contrarian
profits. Similarly, the largest contributing factor for momentum profits
is the underreaction effect, whereas cross-sectional risk is the second
largest factor that positively affects momentum profits. Unlike
contrarian profits, lead-lag effect reduces the momentum profits in the

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