There is extensive international evidence that the momentum strategy yields positive abnormal returns when short-term periods are considered, whereas the contrarian strategy is effective for long-term periods. However, this topic has received scarce attention in the Spanish stock market. We show that these two phenomena seem to be present in this market, and in particular that the 12-month momentum strategy and the 60-month contrarian strategy yield positive abnormal returns, although the effectiveness of the contrarian strategy is under suspicion when non-overlapping test periods are used. Our study therefore provides additional evidence that the results obtained in the literature on this topic are not from data snooping.
Our study examines whether behavioural theories can explain post-earnings announcement drift (i.e. earnings momentum) in the Spanish market. In particular, we test models proposed by Barberis et al. (Journal of Financial Economics, 49, pp. 307-343, 1998), Daniel et al. (Journal of Finance, 53(6), pp. 1839-1885, 1998) and Hong and Stein (Journal of Finance, 54(6), pp. 2143-2184, 1999). Each of these behavioural models draws on two premises - cognitive biases and limits to arbitrage - that we assume will vary with a given country's cultural and institutional features. Therefore, we must exercise caution when extrapolating the favourable results observed in the US market to markets outside of the USA. Our results provide little evidence in support of the hypothesis used to test whether these models can indeed explain the earnings momentum anomaly in the Spanish market. We believe some characteristics of the Spanish market, such as its lower score on the Individualism Index, lower levels of investor protection and code-law-based legal system, may explain why our results differ from those obtained in the USA.
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