Have Investors in the Banking Sector Become More Conservative in the Long Run?

Abstract

Previous research examined contrarian investment strategies in different stock markets, but this research examines the contrarian strategy in a particular industry, the banking sector, over the period 2000–2017. The results show that in the first subperiod ending in 2009, banking stocks experienced contrarian (reversal) abnormal returns up to the three-year test period, depending on the formation period. In the second subperiod, banking winner portfolios outperformed loser portfolios; i.e., banking stocks experienced momentum abnormal returns up to the three-year test period, again depending on the formation period. The findings suggest that investors in the banking sector changed their investment behavior and became conservative after the recent financial crisis. The difference in returns cannot be attributed to risk, size or book-to-market ratio. However, winner portfolios seemed to have a higher earnings-to-market ratio, which might suggest underreaction to earnings news. The results of this paper have profound policy implications for the banking sector and stock market regulators, as well as for investors in the banking industry.