Asymmetric return reversals and contrarian profitability: evidence from pacific-basin equity markets

Abstract

Using the ANST-GARCH(M) model that allows asymmetry on both the mean and variance equations, this paper shows that the nine Pacific Basin equity markets exhibit asymmetric property of return reversals in the short horizon. This paper demonstrates that the asymmetric reverting property can be a source of the contrarian profitability with the findings, that a negative return on average reverts more quickly with a greater magnitude to a positive return than a positive return reverting to a negative return. These asymmetric return reversals appear directly associated with a reduction in risk premium by investors in some instances; a reduction in premium under a prior negative return shock raises current stock price. We conclude that time series analysis of the asymmetric reverting behaviors per se gives credence to the purported merit of the contrarian portfolio strategy.