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Long-Term Return Reversal: Evidence from International Market Indices

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper titled “Long-Term Return Reversal: Evidence from International Market Indices” presents an insightful analysis of the nuanced dynamics underpinning the long-term returns of international equity markets. Authored by Mirela Malin and Graham N. Bornholt from Griffith University, this study sheds light on the compelling evidence of reversals in the long-term performance of market indices.

The authors adeptly employ a late-stage contrarian strategy to select securities poised for reversal, offering a novel perspective that yields stronger evidence of long-term return reversal compared to traditional contrarian strategies. In a post-1989 subsample, despite the absence of cross-sectional contrarian profits in developed markets, the longitudinal analysis uncovers robust evidence of reversals.

Consequently, these findings signify a noteworthy amplification of the strength and pervasiveness of long-term return reversals, deconstructing conventional understandings and underscoring the intricate interplay of contrarian effects and international financial integration.

Abstract Of Paper

This paper documents evidence of reversals in the long-term returns of international equity markets. We use recent short-term performance to better select contrarian securities that appear ready to reverse. Our late-stage contrarian strategy consistently provides stronger evidence of long-term return reversal than does the traditional pure contrarian strategy when applied to developed and emerging market indices. Despite an absence of cross-sectional contrarian profits for developed markets in our post-1989 subsample, longitudinal analysis provides strong evidence of reversals during this period. Overall, our results suggest that the reversal of long-term returns may be stronger and more pervasive than is generally understood.

Original paper – Download PDF

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Author

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

Graham N. Bornholt
Griffith University

Conclusion

In summary, “Long-Term Return Reversal: Evidence from International Market Indices” by Mirela Malin and Graham N. Bornholt offers a compelling deconstruction of the conventional wisdom surrounding long-term returns in international equity markets. By leveraging a late-stage contrarian strategy, the study consistently demonstrates robust evidence of long-term return reversal, surpassing the efficacy of traditional pure contrarian approaches across both developed and emerging market indices.

Despite the absence of cross-sectional contrarian profits in developed markets in the post-1989 subsample, the longitudinal analysis unveils a formidable resilience of reversals during this period. Consequently, the study’s findings compellingly challenge the existing understanding of the strength and pervasiveness of long-term return reversals, emphasizing the crucial interplay of contrarian effects and international financial integration.

The invaluable insights presented in this research beckon further exploration and refinement, elucidating a rich landscape of potential avenues for future inquiry into the enigmatic dynamics of international market indices.

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FAQ

How does the late-stage contrarian strategy employed by Malin and Bornholt enhance the identification of securities poised for long-term return reversal, and what distinguishes it from traditional pure contrarian strategies?

The late-stage contrarian strategy used by Malin and Bornholt involves leveraging recent short-term performance to select securities that exhibit signs of being ready to reverse. Unlike traditional pure contrarian strategies, this approach integrates short-term performance metrics, providing a novel perspective in the identification of securities poised for reversal. The distinguishing factor lies in the strategic incorporation of short-term dynamics, potentially offering a more accurate and timely identification of securities on the brink of long-term return reversals.

What are the key findings regarding the strength and pervasiveness of long-term return reversals in both developed and emerging market indices, and how do these findings challenge or enhance the conventional understanding of cross-sectional contrarian profits, particularly in the post-1989 subsample of developed markets?

The study’s key findings reveal robust evidence of long-term return reversals in both developed and emerging market indices. In the post-1989 subsample of developed markets, despite the absence of cross-sectional contrarian profits, longitudinal analysis demonstrates a significant and resilient presence of long-term reversals. These findings challenge the conventional understanding of cross-sectional contrarian profits by highlighting the strength and pervasiveness of long-term return reversals, even in the absence of short-term contrarian profits in developed markets.

In what ways does the study contribute to our understanding of the interplay between contrarian effects and international financial integration, and what implications do the robust evidence of long-term return reversals have for investors and researchers in the context of constructing effective investment strategies within international equity markets?

The study contributes to our understanding of the interplay between contrarian effects and international financial integration by showcasing that long-term return reversals are stronger and more pervasive than previously understood. The robust evidence implies that investors and researchers should consider incorporating late-stage contrarian strategies for more effective identification of securities with potential long-term reversals. These findings underscore the importance of adapting investment strategies to account for the nuanced dynamics of long-term return reversals within the framework of international equity markets.

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