Evolution of short-term contrarian profits

Purpose: The purpose of this paper is to study the US stock market and try to explain why short-term contrarian profits have largely disappeared in the past two decades. Design/methodology/approach: In this work, the authors decompose the short-term contrarian profits into cross-sectional variations, firm-level overreactions and lead-lag effects to study the changes in their shares. Then, the authors study the behavior of the subgroups in the winner and loser subportfolios of contrarian investment strategies. Findings: The authors find that short-term contrarian profits have largely vanished since 2000. Changes in the shares of the three components of contrarian profits, which are cross-sectional variations, firm-level overreactions and lead-lag effects, are not the main reason for the disappearance of contrarian profits in the past two decades. Instead, the disappearance of short-term contrarian profits is primarily due to the heterogeneous evolution of subgroups in the portfolio, which leads to a decrease in the overall level of overreactions that drive the contrarian profit. Originality/value: The work explains the disappearance of short-term contrarian profits in the US stock market.