The purpose of this study is to look whether contrarian strategy works in Korean stock market or not and to examine naive expectation hypothesis using Korean stock market. For the study, Stock prices from Apr 1982 to Apr 1997 in Korea Stock Exchange (KSE) are used to form portfolios and portfolios are formed based on five variables-past 3-year return, PER, PBR, PCR and PSR for each year.
The results of Portfolio based on past 3-year return, PBR and PSR investments say that Loser stocks earn higher returns than Winner stocks but it is hard to find evidence in the portfolios of PCR and PSR that loser stocks beat winner stocks.
The test of naive expectation hypothesis says that investors are excessively optimistic about winner stocks and excessively pessimistic about loser stocks because they think past growth will continue. So it is possible for contrarian investments strategy to earn high returns. Conclusively contrarian strategy works in Korean stock market
