Investigating the Reverse Hypothesis of Long-run Return Trends in Tehran Stock Exchange

This study investigates the long-run reversal effects using the data of 178 listed companies in Tehran Stock Exchange for a period of 2009-2017. The hypothesis of long-run reversal (contrarian) effect implies that loser (winner) portfolios become winner (loser) portfolios in the long-run. The result shows the existence of reversal profits in stock returns for a period of 36 months. In addition, this reversal effects are asymmetrical and the result is not true for the winner stocks. In the following, the study examines whether this increase in the future return of loser stocks be attributed to their increased risk. In other words, winner stocks will still be losers in the long run even after risk-adjustments. For this purpose, the CAPM was used. This model cannot fully explain the long-run reversal profits even by controlling the effects of size, value, and liquidity. In the contrary, multi-factor asset pricing models were able to fully explain the long-run reversal profits, in which size has a greater significance effect than other risk factors. These findings suggest that the long-run loser portfolio consists of small stocks with a higher risk as compared to the winner portfolio. Therefore, the excess profits from loser portfolios are nothing but compensation for the risk held. Accordingly, the contrarian investment strategy cannot be considered as a strategy to earn abnormal returns in Tehran Stock Exchange.