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123 ISSN 2029-4581. ORGANIZATIONS AND MARKETS IN EMERGING ECONOMIES, 2010, VOL. 1, No. 2(2) PROFITABILITY OF CONTrRIAN STrTEGIES: EVIDENCE FROM THE STOCK EXCHANGE OF MAURITIUS Ushad Agathee Subada±* University of Mauritius, Mauritius Muhammad Anas Hossenbaccus A.R. University of Mauritius, Mauritius Abstract. Te aim of this paper is to assess the profitability of contrarian strategies on the Stock ex- change of Mauritius. Using data Fom 2001 till 2009 for all 40 listed companies on the official mar- ket, the study shows li±le support in favour of the contrarian effect. In particular, the losers portfolio seems to outperform the winners portfolio in one out of nine strategies. However, when considering the market return, negative excess returns are noted for all portfolios across all strategies, providing strong support for a passive portfolio management strategy and weak support for overreaction hypothesis. In addition, the Size, Price, Earnings to Price (E/P) and Book to Market (B/M) Effect has been tested. Te results suggest that the average market return is greater than size-based portfolios and price-based portfolios. However, when accounting for the E/P and the B/M effect, there seems to be a strategy which can beat the market. Nevertheless, most strategies for E/P and B/M portfolios indicate insignifi- cant excess returns. In general, the results of this paper are undoubtedly in sharp contrast with most po- pular studies in developed markets. However, it is observed that investors on the SEM may not possess similar characteristics to those of well-advanced markets. In particular, according to Harvey (1995), emerging market countries are sometimes relatively isolated Fom capital markets of other countries. Key words: contrarian, efficient market hypothesis, stock market, AFican markets, Mauritius 1. Int±oduction Several studies 1 have investigated the profitability of trading strategies that exploit in- terdependence of time-series returns and show that these strategies could lead to excess returns. In this respect, De Bondt and ±aler (1985) presented a controversial study that has seriously threatened the validity of the weak-form efficient market hypothesis. ±ey found that long-term past losers (lowest-return stocks) outperform long-term * Corresponding author. Mailing address: Finance and Accounting Department, Faculty of Law and Manage- ment, University of Mauritius, Reduit, Mauritius. Phone No. +230 4037516. E-mail: [email protected] 1 Campbell & Limmack (1997), Baytas & Caciki (1999), Zamri & Simon (2001), Jegadeesh & Titman (2001) amongst others.
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124 past winners (positive or highest return stocks) over the subsequent three to five years. Stocks with poor three-to-five year past performance seem to earn higher average re- turns than stocks that have performed well in the past. Tey demonstrated that an arbi- trage portfolio of losers and winners can yield an average return of 25% over a three year period. Contrarian strategies that buy past losers and sell past winners are also called the Winners and Losers effect.
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