Three essays on contrarian returns in Asian emergingmarkets / Ali Fayyaz Munir

Ali Fayyaz , Munir (2023) Three essays on contrarian returns in Asian emergingmarkets / Ali Fayyaz Munir. PhD thesis, Universiti Malaya.

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Abstract

This study evaluates the contrarian effect in time-varying circumstances of emerging Asian economies. The study is divided into three objectives: (i) To examine the relationship between varying stock market conditions and contrarian returns with reference to the dynamic market assumption of Adaptive Market Hypothesis (AMH); (ii) To examine the impact of firm-specific, industry-specific and macroeconomic factors on contrarian strategy’s profitability; and (iii) To examine the impact of varying degrees of financial liberalization on contrarian strategy payoffs. Accordingly, each research objective is represented by a separate essay. The first essay dealing with objective 1 investigates the relation between time-varying stock market conditions and contrarian returns in South Asian stock markets based on the dynamic market assumption of the Adaptive Market Hypothesis (AMH). Not only the existence of significant contrarian returns is confirmed in all the sample emerging markets, but the study also finds that these returns are time-varying, where the excess return opportunities wax and wane over time based on contrarian portfolios. Further investigations indicate that contrarian returns strengthen during the negative market states, higher volatility and crises periods, particularly during the Asian financial crisis. Interestingly, the market state is found to be the primary predictor of contrarian payoffs instead of market volatility, which contradicts the findings of developed markets. The second essay addressing objective 2 examines the predictive ability of firm-specific, industry-specific and macroeconomic factors over contrarian strategy payoffs. By employing portfolio formation and subsequent rebalancing methodology, this study finds that firm-specific factors such as trading volume and market value have significant predictive power towards contrarian returns. Stocks with lowest trading volume group generate highest contrarian returns. This finding supports the conjecture that trading volume proxying information asymmetry can be a determining factor for contrarian profitability in South Asian stock markets. Regarding industry analysis, the empirical findings provide evidence for short-term industry contrarian effect. Using data spanning different market states, the study finds that industry contrarian effect was stronger during the Asian and global financial crisis, while industry momentum effect was evident after the global financial crisis and during COVID epidemic. The overall findings of this section imply that Industry aspect cannot be neglected while interpreting the returns of trading strategies in emerging markets. Next, the findings based on predictive regressions suggest that three-month treasury rate, balance of trade and world market return (MSCI) have significant predictive power for contrarian profitability in South Asian stock markets. Finally, the third essay representing objective 3 investigates the behavior of contrarian strategy payoffs under varying degrees of financial liberalization in Asia-Pacific emerging markets, namely China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines and Thailand. These markets represent economies that display a gradual change in the degree of financial liberalization instead of fully opening their markets to foreign investors at once. By using the dataset of all listed firms and four different measures of the degree of financial liberalization, the study employs portfolio formation, panel regressions and binary modelling methods to reveal the impact of partial and complete financial liberalization on contrarian returns. This study documents a negative relationship between the degree of financial liberalization and contrarian strategy payoffs. The results further indicate that small-sized emerging markets reveal more significant and higher contrarian returns as compared to their larger counterparts. The study findings are consistent with the investor-base broadening hypothesis, where the small and less liberalized emerging markets offer opportunities for investors and fund managers to produce abnormal contrarian returns that cannot be earned by other conventional investment strategies.

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