Sector Neutral Contrarian Strategies: - A study of short-term contrarian strategies in the Dow Jones STOXX 600

Sammanfattning: This paper studies short-term contrarian strategies in the Dow Jones STOXX 600 between 1993 and 2008 taking on a sector neutral approach. The contribution to the literature is two folded. First, we investigate short-term contrarian strategies on an index covering 18 European countries. Second, we investigate the impact of the industry effect on short-term contrarian strategies. Short-term contrarian strategies are based on buying past loser and selling past winners. We investigate the profits derived from holding this strategy over one, two and three weeks following a week of formation. Practitioners in the hedge fund industry often restrict their long-short equity portfolios to be sector neutral, indicating that industry effects are of importance in risk management. We compare two zero-investment contrarian strategies where one has a reduced net exposure to industry effects (sector neutral strategy) and one is fully exposed to industry effects (generic strategy). Both strategies generate significant contrarian profits after controlling for risk, but when taking transaction costs in the form of bid-ask spreads into consideration profits disappear. Furthermore the sector neutral strategy proves superior to the generic strategy in terms of return to variability.