Return reversal of Latin American industries
Keywords:
Contrarian strategy, Emerging stock markets, Five-factor model, Industry portfoliosAbstract
Purpose: This study analyzes inter-industry reversal, or whether loser or underperforming industries yield higher returns than winner or outperforming industries in Latin America. The phenomenon is likewise examined in market segments that are more prone to inefficiencies and short-selling barriers. It also investigates intra-industry reversal by assessing whether loser stocks outperform winner stocks within the same industry. The analysis is then extended to market segments defined by stock characteristics.
Design/methodology/approach: Long-term reversal for industry portfolios is evaluated following the portfolio simulation approach proposed by Jegadeesh and Titman (1993). When testing multiple hypotheses simultaneously, the probability of reporting false positives increases substantially. To account for multiple hypothesis testing, p-values are adjusted using several well-established approaches.
Findings: No evidence of inter-industry reversal for the whole market or for specific market segments was found. Moreover, in both the entire market and certain segments, a contrarian intra-industry reversal strategy does not yield profits. Overall, investors in Latin American industries would have been unable to profit from exploiting return reversion across and within industries in the region.
Research limitations/implications: The study focuses on formation periods of up to five years and holding periods of up to a year, as constrained by data availability. This limitation restricts the range of reversal strategies that can be analyzed (e.g. formation periods of a decade are not considered). As additional data become available, this limitation will be less severe.
Practical implications: This paper builds on our previous paper that explored industry return continuation or momentum. Overall, neither momentum nor reversal at the industry level appears to be significant in Latin America’s most important equity markets. Violations of weak-form market efficiency at the industry level in Latin America are not supported by our findings.
Originality/value: This paper contributes by providing new evidence on both inter- and within-industry reversal in a region that is frequently overlooked in international studies. It also adds to the literature by analyzing reversal in market segments related to industry and stock characteristics such as size or market cap. In addition, the study addresses the issue of multiple hypotheses testing, which is often neglected in existing literature.
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