The last fifty years of financial theory has been built upon the notion that the capital markets are efficient in their incorporation of new information. Under the null hypothesis of market efficiency, publicly available information, such as recent stock performance, cannot be used [0 earn abnormal returns. In apparent contradiction to the efficient market hypothesis, however, a growing Behavioural Finance literature suggests that abnormal profits may be earned from contrarian investment strategies.
The aim of this study is to assess the robustness of such findings across a variety of methodologies employed in the extant literature. Using Australian equity returns, the standard DeBoodt and Thaler (1985) methodology, based on cumulative abnormal returns, detected some evidence of market overreaction. An alternate methodology, however, based on holding period returns and advocated by Conrad and Kaul (1993), did not support these findings. In addition, a range of other methodological variations produced disparate results. Such findings appear to be consistent with the arguments of Fama (1998), that apparent anomalies are likely to be a function of chance, methodological choices and/or "data-snooping," rather than true departures from market efficiency.