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Industry Long-Term Return Reversal Explained

Last Updated on 10 February, 2024 by Rejaul Karim

In their research paper, “Industry Long-Term Return Reversal,” Graham N. Bornholt, Omar Gharaibeh, and Mirela Malin from Griffith University examine the phenomenon of long-term return reversal in industry returns.

The study delves into the possibility of structural changes within industries leading to reversals in industry fortunes, and employs both pure contrarian and late-stage contrarian strategies to investigate the evidence. With formation periods spanning up to 132 months, the researchers aim to allow sufficient time for these structural changes to take effect.

The findings indicate strong evidence of long-term return reversals in industries, with effects observed for up to ten years after commencement. These results challenge the notion of overreaction and provide valuable insights into the dynamics of industry returns.

Abstract Of Paper

Given that extreme industry returns may herald long-term structural changes in the industries involved that may eventually lead to reversals in industry fortunes, we investigate the evidence for long-term return reversal in industry returns. Our study employs both pure contrarian strategies and late-stage contrarian strategies, and includes extra-long strategy formation periods (up to 132 months) to allow sufficient time for structural changes to begin. We find strong evidence of reversals in the long-term returns of industries. These reversals continue for many years (with valuation effects observed up to ten years after commencement) and are difficult to reconcile with overreaction.

Original paper – Download PDF

Here you can download the PDF and original paper of Industry Long-Term Return Reversal.

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Author

Graham N. Bornholt
Griffith University

Omar Gharaibeh
Griffith University – Griffith Business School

Mirela Malin
Griffith University – Department of Accounting, Finance and Economics

Conclusion

In conclusion, the research conducted by Bornholt, Gharaibeh, and Malin provides compelling evidence of long-term return reversal in industries. The study’s use of pure contrarian and late-stage contrarian strategies, combined with extended formation periods, has shed light on the enduring nature of these reversals.

The findings challenge the conventional wisdom of overreaction and point to the existence of structural changes within industries, leading to prolonged reversals in industry fortunes.

The implications of this research are significant, as the observed valuation effects continue for many years post-commencement, suggesting a complex interplay of factors contributing to industry returns.

This study enriches our understanding of industry dynamics and provides valuable insights for investors, analysts, and policymakers alike.

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FAQ

What is the main focus of the research paper “Industry Long-Term Return Reversal” by Bornholt, Gharaibeh, and Malin?

The main focus of the research paper is to investigate the phenomenon of long-term return reversal in industry returns. The authors explore the possibility that extreme industry returns may signal long-term structural changes within the industries, leading to reversals in industry fortunes. The study employs both pure contrarian and late-stage contrarian strategies with extended formation periods to allow sufficient time for these structural changes to take effect.

What strategies are used in the paper to examine long-term return reversal in industries?

The paper utilizes both pure contrarian strategies and late-stage contrarian strategies to examine long-term return reversal in industries. The strategies involve extended formation periods, some lasting up to 132 months, to allow for a thorough exploration of the dynamics and effects of long-term reversals.

What does the research reveal about the evidence of long-term return reversal in industries?

The findings of the research indicate strong evidence of long-term return reversal in industries. The reversals persist for many years, with valuation effects observed up to ten years after commencement. This suggests that there are enduring structural changes within industries that contribute to prolonged reversals in industry fortunes.

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