Cross-Sectional Mean Reversion Effect on Developed and Emerging Capital Markets

This paper examines the short-term and long-term performance of strategies based on cross-sectional mean reversion effect in emerging and developed capital markets during the period from January 2000 to April 2016. The data consists of weekly and monthly closing share prices of the companies operates in capital markets of USA, Germany, HongKong, Russia, Brazil and Mexico. The results indicate the presence of significantly positive abnormal returns of short-term contrarian strategy for holding periods of 1 to 2 weeks across various ranking horizons for all markets. We perform analysis on the impact of the stock market conditions on profitability of contrarian strategy. The findings indicate that the short-term contrarian effect is significant in bearish states, but disappears in bullish states. It was found that the January effect has no practically impact on the results of contrarian strategy. The relative similarity of the outcomes for various capital markets has been obtained as a result of taking into account their specificities in market risks and transaction costs. However, the findings reveal that price reversals are not as prominent in the long term. We find that the returns are no significant for all capital markets for the holding period from 13 to 36 months. The results indicate that price reversals don't occur for prior winners experiencing strong negative returns before adjustment for risks and transaction costs. In general the results show that the considered capital markets is not efficient in the weak form.