Middle East Countries’ Stock Markets under Contrarian and Momentum Strategies

1475 Words 6 Pages
This research aims to investigate the Middle East countries’ stock markets within the framework of momentum and contrarian strategies. Potential foreign investors, who have been able to make direct investments in the Middle East countries’ stock markets, should study the recent history of these stock markets in order to understand the risks that accompany the high returns. Accordingly this research considers the Middle East countries’ stock markets from January 1997 to December 2010 and provides an analysis of their performance under various momentum and contrarian strategies. The research method that is employed draws upon and is an extension of Lo, Andrew W. and A. Craig MacKinlay, 1990 and Jegadeesh, Narasimhan and Sheridan Titman, …show more content…
1287). This conjecture is consistent with a number of plausible explanations. For instance, Conrad and Kaul (1998) claim that momentum profits are primarily due to cross-sectional variation in unconditional mean returns. According to Conrad and Kaul’s arguments, if realized returns are strongly correlated to expected returns, then past winners (losers) that have higher (lower) returns tend to yield higher (lower) expected returns in the future. Thus, momentum strategies that buy past winner industries and short sell past loser industries would be profitable. Alternatively, the price momentum can also be explained by several existing behavioral models (e.g. Barberis et al., 1998; Daniel et al., 1998; Hong and Stein, 1999), which attempt to provide a theoretical framework for the empirical return anomalies documented in the finance literature. Hong and Stein (1999) propose a framework under which there are two types of investors: news watchers and momentum traders. Hong and Stein show that stock prices underreact to information in the short run if information diffuses gradually across news watchers. Their model indicates that this initial underreaction will induce trading from momentum traders, thereby exploring slow price movement. Eventually, prices will reverse to fundamentals in the

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