An investigation into the winner-loser and momentum anomalies in four medium-sized European markets

The allocative efficiency of financial markets is of central importance to academics, investors, and regulators. However, there is a dearth of research relating to the efficiency of medium-sized European markets. This thesis addresses this research gap by examining the winner-loser and momentum anomalies in Ireland, Greece, Norway, and Denmark. The profitability of contrarian and strength rule strategies is examined using a variety of models and rank and holding periods of differing lengths. Existing research establishes a strong link between the two anomalies under review and the behaviour of brokers. Therefore, this study also analyses the economic value and impact of brokers’ recommendations and forecasts in the Irish market. There is substantial evidence of market inefficiency with significant return continuation in Ireland and reversals in the other three markets. Risk-adjusted returns are significantly higher when portfolios are comprised of extreme winners and losers. There is evidence of momentum followed by reversal in two of the four markets. Average monthly momentum returns peak after approximately two months in Ireland, while the optimum approach in the other three markets involves skipping one year before implementing the contrarian strategy. Brokers’ recommendations earn modest abnormal returns by exploiting the superior performance of small firms with positive momentum. However, such returns are significantly reduced by the relatively poor performance of stocks with low book-to-market and high earnings-to-price ratios that brokers favourably recommend. Recommendation revisions are of greater value but fail to outperform relatively straightforward trading strategies based on momentum, size, book-to-market, and price-earnings ratios. Brokers’ recommendations do not induce a significant increase in trading activity. Taken together, this suggests that brokers follow momentum strategies but are not a key driver of momentum