Transcript Contrarian Rules

Contrarian Rules
• Return-based Strategy
For winner and loser portfolio, the weight, wit, is
given to a security i at time t as:
wit = Ri,t-1/(R1,t-1+...Rn,,t-1)
where n=winner (i.e., Ri,t-1>0) or
for loser (i.e., Ri,t-1<0).
• Returns-transactions based strategy
Ri,t-1(1+vit-1)
wit =
(R1,t-1(1+vit-1)+...Rn,t-1(1+vn,t-1)
where vit-1=(Volit -Volit-1)/volit-1
• Non-linear Returns Based Rule
The weight given to the winner or loser portfolio
will be:
Ri,t-1(1+|Rit-1|)
wit =
(R1,t-1(1+|R1t-1|)+...Rn,t-1(1+|Rnt-1|)
• Traditional t-test statistics
t = mean/[sd/n0.5],
where: n is the number of
observations
• Assumption: observations are
randomly and identically distributed.
• Newly-West t-statistics:
s2NW=s2 + 2(w1s21+...wns2n)
wj = 1- j/(m+1), m=4 (in Conrad’s)
s21 =(x1x2 + x2x3 + ... )/(T-1)
s22 =(x1x3 + x2x4 + ... )/(T-2)
They are called autocovariances for
demeaned observation xi
The Newly-West t-statistics:
=
mean of observations
sNW/ T0.5