Short-Term Reversal in Equity Index Futures

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Research

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This paper examines whether a simple contrarian strategy can generate excess returns by trading equity index futures based on short term reversals. The authors find that buying recent losers and selling recent winners produced annualized returns of 29.60% in the European sample.

Key Takeaways

Profitable Reversal Strategy: A weekly long short portfolio across 7 European equity index futures earned an annualized return of 29.60% over the 1993 to 2002 backtest.
Simple Trading Rules: The strategy ranks markets using the previous 5 trading days, buys below average performers, shorts above average performers, and rebalances weekly.
Broad Global Evidence: The underlying study analyzed 39 index futures markets from 1992 to 2002, with statistically significant contrarian profits in every region except the U.S.
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