Profitability of the Short-Run Contrarian Strategy in Canadian Stock Markets

Using a time-varying three-factor pricing model, this paper examines the profitability of the short-term contrarian strategy in Canadian stock markets from January 1964 to December 1998. This strategy, which consists in buying losing stocks and selling winning stocks of the previous month, generates statistically significant excess unrestricted returns. However, we show that this result is mainly driven by small firms, especially in January. Moreover, results indicate that short-term contrarian investing is not economically profitable when we account for transaction costs.