Problems in Measuring Contrarian Performance with Jensen's Alpha: A Reconciliation of Real-Time and Event-Time Tests

Posted: 17 May 2001

See all articles by Steven L. Jones

Steven L. Jones

Indiana University - Kelley School of Business - Department of Finance

John C. Yeoman

North Georgia State University

Date Written: September 2001

Abstract

Much of the early research on contrarian performance adjusts for risk using a Jensen's alpha estimated with in-sample returns in either real time or event time. The use of in-sample returns means that beta is estimated with the same observation period returns it is intended to risk adjust. This results in attributing systematic sources of overreaction to beta-risk and understates contrarian performance. Several later papers find mixed results when they attempt to correct for this problem using alternative Jensen's alpha-based methods, the relative merits of which are not well understood. In this paper, we identify the sources of bias that arise from these alternative methods. Our analysis indicates that the methods are all biased against detecting contrarian performance. The event-time Jensen's alpha is the most heavily biased, regardless of whether its beta is estimated in-sample, or conditional on formation period market returns. A real-time Jensen's alpha conditioned on formation period returns is the least biased against contrarian performance. We reject a joint hypothesis of the CAPM and market efficiency because this conditional real-time alpha detects significant long-horizon contrarian performance.

JEL Classification: G12

Suggested Citation

Jones, Steven L. and Yeoman, John C., Problems in Measuring Contrarian Performance with Jensen's Alpha: A Reconciliation of Real-Time and Event-Time Tests (September 2001). Available at SSRN: https://ssrn.com/abstract=249057 or http://dx.doi.org/10.2139/ssrn.249057

Steven L. Jones (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

801 W. Michigan Street
Bus/SPEA 4048
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317-278-7771 (Phone)

John C. Yeoman

North Georgia State University ( email )

School of Business
Dahlonega, GA 30957
United States
770-664-4188 (Phone)

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