Portfolio Optimization and the Momentum- Contrarian Strategy (MCS)- Based Performance: Evidence from Tehran Stock Exchange

Subject Areas : Business Strategy

Homayun Soltanzadeh ¹ , Reza Keykhaei ^{2 *} , Abdolmajid Abdolbaghi Ataabadi ³ , Mohammad Hosein Arman ⁴

1 - Department of Management , Najafabad Branch, Islamic Azad University, Najafabad, Iran.
2 - Department of Management, Najafabad Branch, Islamic Azad University, Najafabad, Iran.
3 - Department of management,Faculty of Industrial Engineering & Management , Shahrood university of technology, shahrood . iran
4 - Department of Managment, Najafabad Branch, Islamic Azad University, Najafabad, Iran

Received: 2022-09-03 Accepted : 2022-11-16 Published : 2023-07-01

Keywords: Mean-variance model, Portfolio optimization, Optimal Portfolio Momentum, Optimal Portfolio Contrarian,

Abstract :

This study was conducted to determine the stock portfolio with the best return and low-risk investments using momentum-contrarian strategies (MCSs). The momentum-Contrarian strategy is one of the well-known models to construct the portfolio which suggests buying the stocks with the best performance (the winner stocks) and selling the stocks with the worst performance (the loser stocks). The optimal values of the portfolio's objective function and the weight of all assets in the portfolio that are not necessarily the same are calculated by defining a nonlinear multivariate optimization model combined with momentum-contrarian strategies (MCSs). The return information of companies listed on the Tehran Stock Exchange from 2014 to 2019 was used to select the best optimal portfolio. The results confirmed the stability in the profitability of the contrarian optimal portfolio with minimum risk compared to other optimal portfolios. Furthermore, through MATLAB software the optimal weight of assets in the optimal portfolio is calculated based on statistical data.

References:

1. Islami Bidgoli, G., Nabavi Chashmi, S., Yahya Zadeh Far M., & Ikani S. (2010). Looking at the profitability of momentum strategy in the Tehran Stock Exchange. Quantitative Studies in Management, 1, 1-56. (in Persian) http://www.iaujournals.ir/article_517205.html


2. Bahri Sales, J., Pak Maram, A., Afroozian Azar, , & Qaderi, G. (2018). The portfolio relationship between the eyes and the loss of the eye based on the stocks of stocks with momentum and reversal: investment science. Quarterly Review of Investment, 28, 297-312. (in Persian) https://jik.srbiau.ac.ir/article_13321.html


3. Ball, R., & Kothari, S. P. (1989). Nonstationery Expected Returns: Implications for Tests of Market Efficiency and Serial Correlation in Returns. Journal of Financial Economics, 25, 51-74. https://doi.org/10.1016/0304-405X(89)90096-2


4. Brailsford, T. (1992). A test for the Winner-Loser anomaly in the Australian equity market. Journal of Business Finance & Accounting, 19, 225-241. https://doi.org/1111/j.1468-5957.1992.tb00621.x


5. Campbell, K., & Limmack, R. (1997). Long-term overreaction in the UK stock market and size adjustments. Applied Financial Economics, 7, 537-548. https://doi.org/10.1080/096031097333402


6. Chan, K. (1988). On the Contrarian Investment Strategy. Journal of Business, 61, 147-163. https://www.jstor.org/stable/2352897


7. Chan, L., Jegadesh, N, & Lakonishok, J. (1996). Momentum Strategies. The Journal of finance, 51, 1573-2031. https://doi.org/10.1111/j.1540-6261.1996.tb05222.x


8. Chang, R. P., McLeavey, D. W., Rhee, S. G. (1995). Short-term abnormal returns of the contrarian strategy in the Japanese stock market. Journal of Business Finance & Accounting, 22, 1035-1048. https://doi.org/10.1111/j.1468-5957.1995.tb00892.x


9. Chaouachi, O., & Douagi, F. W. B. M. (2014). Overreaction effect in the Tunisian stock market. Journal of Asian Business Strategy, 4(11), 134. http://www.aessweb.com/journals/5006


10. Chen, Q., Hua, X., & Jiang, Y. (2018). Contrarian strategy and herding behaviour in the Chinese stock market. The European Journal of Finance, 24(16), 552-1568. https://doi.org/10.1080/1351847X.2015.1071715


11. Conrad, J., & Kaul, G. (1993). Long-term market overreaction or biases in computed returns. Journal of Finance, 48, 39-63. https://doi.org/10.1111/j.1540-6261.1993.tb04701.x


12. DeBondt, W. F., & Thaler, R. H. (1985). Does the Stock Market Overreact? Journal of Finance, 40, 793-805. https://doi.org/10.1111/j.1540-6261.1985.tb05004.x


13. Demori, D. Saeeda,, Fallahzadeh, A. (2008). Examining the performance of investors in the past performance of listed companies in the Tehran stock exchange. accounting and auditing agreements, sixteenth year. (in Persian)

 

14. Dreman, D.N., & M.A. Berry. (1995). Overreaction underreaction and the low- ple effect. Financial Analysts Journal, July- August, 21-30. https://doi.org/10.2469/faj.v51.n3.1903


15. Dissanaike, G. (1997). Do stock market investors overreact? Journal of Business Finance and Accounting, 24(1), 27-49. https://doi.org/10.1111/1468-5957.00093


16. Doan, M. P., Alexeev, V., & Brooks, R. (2016). Concurrent momentum and contrarian strategies in the Australian stock market. Australian Journal of Management, 41(1), 77-106. https://doi.org/10.1177/0312896214534864


17. Fadaeinejad, M. I., & Sadeghi, M. (2005). Review of the utility of momentum and reverse strategies. Journal of Management Message, 17, 7 – 37. (in Persian) dor: 1001.1.22519165.1394.6.25.6.8


18. Fama, E., & French, K. (1996). Multifactor Explanations of Asset Pricing Anomalies. Journal of Finance, 51, 55-84. https://doi.org/10.1111/j.1540-6261.1996.tb05202.x


19. Foster, K. R., & Kharazi, A. (2008). Contrarian and Momentum Returns on Iran’s Tehran Stock Exchange. Journal of International Financial Markets, Institutions & Money, 18, 16-30.

https://doi.org/10.1016/j.intfin.2006.05.003

20. Griffin,J.M., Harris,J.H., & Topaloglu,S. (2003). The Dynamics of Institutional and Individual Trading. Journal of finances, 58(6), 285-320. https://doi.org/10.1046/j.1540-6261.2003.00606.x


21. Grinblatt,M., &Titman,S. (1989). Mutual fund performance: an analysis of quarterly portfolio holdings. Journal of Business, 62, 394-415. https://doi.org/10.2307/2331338


22. Jegadeesh,N., & Titman,S. (1993). Returns to buying winners and selling losers: implications for stock market efficiency. Journal of Finance, 48:65-91. https://doi.org/10.1111/j.1540-6261.1993.tb04702.x


23. Kadoya, S., Takashi, K., & Takashi, N. (2008). Contrarian investment strategy with data envelopment analysis concept. European Journal of Operation Research, 189(1), 120-130. https://doi.org/10.1016/j.ejor.2007.05.033


24. Kang, M., Khaksari, S., & Nam, K. (2018). Corporate investment, short-term return reversal, and stock liquidity, Journal of Financial Markets. https://doi.org/10.1016/j.finmar.2018.02.001


25. Kashif, M., Saad, S., Chhapra, I. U., & Ahmed, F. (2019). Empirical evidence of overreaction hypothesis on Karachi stock exchange (KSE). Asian Economic and Financial Review, 8(4), 449. https://doi.org/10.18488/journal.aefr.2018.84.449.465


26. Keshavars, S., Vaziri Sereshk, M., Abdolbaghi Ataabadi, A., & Arman, M. (2022). Trading strategies based on trading systems: Evidence from the performance of technical indicators. Journal of System Management, 8(1), 37-50. https://doi.org/10.30495/jsm.2022.1937933.1509


27. Heidari Haratmeh, M. (2021). Portfolio optimization and random matrix theory in the stock exchange. Innovation management and operational strategies, 2(3), 257-267. (in Persian) http://dx.doi.org/10.22105/imos.2021.289758.1109


28. Hon,M,T. & Tonks.I.(2003). Momentum in the UK stock market. Journal of Multinational Financial Management, 13, 43-70. https://doi.org/10.1016/S1042-444X(02)00022-1


29. Hong, H, Lim, T & Stein, J. (2000). Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies. The Journal of Finance, https://doi.org/10.1111/0022-1082.00206


30. Markowitz, H. (1952). Portfolio selection. Journal of Finance, 77-91. https://doi.org/10.2307/2975974


31. Mahdavi, K., Aziznejad, S., & Tari, F. (2013). Evaluating the strategy of reverse investment in the Tehran stock exchange. parliament and strategy, 73, 25 - 103. (in Persian) https://www.sid.ir/fa/journal/ViewPaper.aspx?id=194446

32.    Makipour, A, & Dasgher,M. (2016). Basic information in technical trading strategy by combining operational cash flow with momentum and reverse. Quarterly Journal of Financial Knowledge of Securities Analysis,36, 13-24. (in Persian) https://www.sid.ir/fa/JOURNAL/ViewPaper.aspx?id=303023

33. Maheshwari, S., & Dhankar, R. S. (2015). Seasonality in momentum profits: evidence from the Indian stock market. Journal of Commerce & Accounting Research, 4(3),­ 8-18. https://doi.org/10.1108/JAMR-11-2015-0081


34. Mehdian, S., Nas, T., & Perry, M. J. (2008). An examination of investor reaction to unexpected political and economic events in Turkey. Global Finance Journal, 18, 337-350. https://doi.org/10.1016/j.gfj.2007.06.002


35. Mehrani, S., & Nonhal Nahr, A. A. (2007). Examining the possibility of using the reverse transactional strategy at the Tehran stock exchange. accounting and auditing studies, 50, 25– (in Persian) https://www.sid.ir/fa/journal/ViewPaper.aspx?ID=74016


36. Nnadi, M., & Tanna, S. (2017). Accounting analyses of momentum and contrarian strategies in emerging markets. Asia-Pacific Journal of Accounting & Economics, 21-1. https://doi.org/10.1080/16081625.2017.1284596


37. Pesaran, M. H., & Zaffaroni, P. (2008). Optimal Asset Allocation with Factor Models for Large Portfolios. Cambridge Working Papers in Economics 0813, Faculty of Economics, University of Cambridge. http://dx.doi.org/10.2139/ssrn.1145183


38. Saeedi, A., & Bagheri, S. (2010). Contrarian Strategy in Tehran Stock Exchange. Financial Research Journal. 12(30), 75-94. (in Persian) 1001.1.10248153.1389.12.30.3.3


39. Salmani Danglani, S., Saeedi, P., Bahramzadeh, H. A., Pourshahabi, F. (2019), Representing the Pattern of Relationship between Personality Traits and Investment Patterns in the Stock Market, Journal of System Management, 5(1), p.79-114. 1001.1.23222301.2019.5.1.5.6


40. Sajadi, S. H. (2018), Reviews of financial theories of the first and second volume, (in Persian)


41. Sinai, H. A., & Ajdarpour, L. (2014). Examining the utility of accelerated and reverse strategy in Tehran stock the scientific Quarterly Review of Accounting, 21, 29-50. (in Persian) http://qfaj.mobarakeh.iau.ir/article-1-111-fa.html

42.    Shariat Panahi,S,M., Sohrabi Iraqi, M., & Shariati, A.(2013), Reverse investment strategy based on reward-risk criteria, Financial Research, 16(1), 113-128. (in Persian) https://jfr.ut.ac.ir/article_51843.html43.    Taheri, A., Shafiee, M., Evazzadeh Fath, F. (2019), Investigating the Role of Non-Financial Information Analysis and Risk- Return Analysis along with Financial Information in Increasing the Efficiency of the Stock Portfolio of Banks, Journal of System Management, 5(3), 123-138. 20.1001.1.23222301.2019.5.3.8.3

44. wallow, S., & Fox, M. A. (1998). Long run overreaction on the New Zealand stock exchange. Commerce Division discussion paper,48. Lincoln University. Commerce Division. Retrieved December 24,­ http://hdl.handle.net/10182/866


45. Zarowin, P. (1990). Stock market and Overreaction. Journal of Financial and Quantitative Analysis. DOI: https://doi.org/10.2307/2330891


46. Qalibaf, A. H., & Kamali, H. (2011). Studying accelerated and reverse strategies in the Tehran stock exchange. Management and Achievement. two monthly scientific journals of conduct, 50, 43-50. (in Persian) http://journals.shahed.ac.ir/article_2126.html