Contrarian Factors in Frontier Markets

Abstract

The objective behind this thesis is to test whether certain contrarian factors can predict longterm stock returns in frontier markets. We do this by measuring simple, observable variables and their effect on returns 1 to 5 years ahead. The study is based on Skagen Funds investment strategy, which seeks to overweight under-valued, under-analyzed and unpopular companies. To identify under-valued companies, we have used price-book and price-earnings measures. For under-analyzed and unpopular, we have used analyst coverage and analyst consensus. In addition, we included index weight as a proxy for size to avoid potential issues with endogeneity. To secure unbiased estimators we control for fixed effects using dummy variables. In addition to this, we estimate standard errors by double clustering to avoid downward biased standard errors. Our results conclude that price-book and index weight are significant determinants on longterm returns. We to do not find that analyst consensus or recommendations affect returns. This indicates that no superior returns can be obtained from buying under-analyzed and unpopular companies. This may however also be due to the choice of wrong proxies. With few exceptions, our results have also been tested to be robust across different regions and sectors. With this research, we make several contributions to the literature: - We believe that we are the first to test the long-term relationships between contrarian factors and long-term returns in frontier markets. - We believe that we are the first to test such relationships after the financial crisis, regardless of holding periods. - As far as we know, we are also the first to use double clustering of standard errors while studying overlapping returns. As this approach increases the robustness of our results, we wish to encourage others to adapt this methodology in future research.