Journal of Investment Strategies

Risk.net

An empirical study of the contrarian strategy against US equities in the Japanese market

Yasuhiro Iwanaga

  • We reveal that when the previous day’s daily return of US stocks is positive (negative), the following day’s intraday return of Japanese stock index futures is negative (positive), which means that the contrarian strategy against US equities is profitable.
  • We devise a new contrarian strategy against US equities utilizing information on the abnormal after-hours return.
  • Out-sample validation of this new investment strategy shows that it has a Sharpe ratio of 1.59 and a Sortino ratio of 2.81, which is superior to a simple contrarian strategy against US equities.

This study examines the contrarian strategy against US equities. We observe a reversal effect against US equities: for samples in which the previous day’s daily return on the S&P 500 index is positive (negative), the following day’s intraday returns on Japanese stock-index futures are negative (positive).We analyze the returns unique to Japan during overnight hours, which we refer to as abnormal after-hours returns. We confirm that samples with positive (negative) abnormal after-hours returns exhibit positive (negative) intraday returns. We divide the sample into cases in which the US and Japanese stock markets have the same investment environment and those in which it differs, and we observe a reversal effect against US equities only in the latter case. We use an out-of-sample analysis to verify the performance of the contrarian strategy against US equities coupled with abnormal after-hours return information, and we find this combination performs better than employing the contrarian strategy against US equities on its own.

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