A Study of Contrarian and Momentum Strategies Based Portfolios in Indonesian Stock Market

Abstract

This paper attempts to examine the effectiveness of contrarian and momentum strategy in Indonesian Stock Market by forming various portfolios on the basis of formation period and holding period. The period of the study was conducted from 2011-2017 and the samples used in this study were stocks listed in EIDO index. In measuring the effectiveness of both contrarian and momentum strategies, cumulative abnormal returns of each stock were used as proxy of this research. Furthermore, to increase the power of the test, this study applied two methods to evaluate the performance to select winner and loser stocks. The first method used market-adjusted model to calculate the abnormal return of the stock while the second method used capital assets pricing model. Besides, this study used overlapping technique by replicating the formation portfolio into 9 times over the period 2011-2013. The results of the study document that the effectiveness of contrarian and momentum strategy is sensitive toward the formation of portfolio and for how long portfolios were held which means that not all formation and holding periods were proven to be effective and significant to generate abnormal return. In the context of contrarian strategy, the effectiveness to generate abnormal return is only proven to be significant within 6 months portfolio formation with short-term 3 and 12 months holding period, while momentum strategy is proven to be effective and significant to generate abnormal return under 3 months portfolio formation for short-term horizons 3 month holding period.