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A Study of the Effects of a Contrarian Approach to Stock Selection in the Irish Stock Market

Fay, Edel (2019) A Study of the Effects of a Contrarian Approach to Stock Selection in the Irish Stock Market. Masters thesis, Dublin, National College of Ireland.

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Abstract

The main question that this paper intends to address is whether evidence of an overreaction effect or contrarian trading strategy exists in the Irish stock market. There have been very few studies of this nature conducted on the Irish Stock Market to date. A contrarian expects that the past price stock movements in one direction will be followed by movements in the opposite direction.

This overreaction effect has been found to exist in almost all major stock markets around the world as many studies have been conducted and published over the last thirty years (Galriotis, 2014). The study will be based on the work of De Bondt and Thaler (1985) which has been identified as the seminal work on this subject.

The methodology will employ a deductive approach. In line with the De Bondt and Thaler (1985) paper, a market adjusted model will be used. Cumulative Abnormal Returns (CAR) will be calculated as the basis for the tests with independent t-tests calculated as a support. It is essentially a technical analysis based on past information.

Two horizon periods of two years and six years will be used to test for evidence of a contrarian strategy in the Irish Stock Market over an eighteen-year period from 2001 to 2018. They will consist of winner and loser portfolios. An arbitrage strategy will also be tested for to see if investors buy losers and sell winner portfolios.

This is also a test of market efficiency at the weak form level. Monthly returns for the specified timeframe have been extracted from the Bloomberg platform.

The results of the study find that there is an overreaction effect in the Irish Stock Market. The profitability of the arbitrage strategy is 2.3% in the two-year period rising to 31.4% in the longer six-year horizon period. These results equate to market inefficiency in the Irish context.

Item Type: Thesis (Masters)
Subjects: H Social Sciences > HG Finance > Investment
H Social Sciences > HG Finance > Investment > Stock Exchange > Irish Stock Exchange
Divisions: School of Business > Master of Science in Finance
Depositing User: CAOIMHE NI MHAICIN
Date Deposited: 21 Oct 2019 12:36
Last Modified: 21 Oct 2019 12:36
URI: http://norma.ncirl.ie/id/eprint/3981

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