Long-term return reversal: Evidence from international market indices

This paper documents evidence of reversals in the long-term returns of international equity markets. We use recent short-term performance to better select contrarian securities that appear ready to reverse. Our late-stage contrarian strategy consistently provides stronger evidence of long-term return reversal than does the traditional pure contrarian strategy when applied to developed and emerging market indices. Despite an absence of cross-sectional contrarian profits for developed markets in our post-1989 subsample, longitudinal analysis provides strong evidence of reversals during this period. Overall, our results suggest that the reversal of long-term returns may be stronger and more pervasive than is generally understood.

► We introduce a new method for detecting long-term return reversal. ► We provide evidence of reversals in developed and emerging market equity indices. ► Cross-sectional strategies do not detect developed markets reversals after 1989. ► Longitudinal analysis uncovers evidence of developed markets reversals after 1989.