When are contrarian profits due to stock market overreaction?

If returns on some stocks systematically lead or lag those ofothers, a portfolio strategy that sells 'winners' and buys 'losers'can produce positive expected returns, even if no stock's returnsare negatively autocorrelated as virtually all models of overreactionimply. Using a particular contrarian strategy we show that,despite negative autocorrelation in individual stock returns,weekly portfolio returns are strongly positively autocorrelatedand are the result of important cross-auto-correlations. Wefind that the returns of large stocks lead those of smallerstocks, and we present evidence against overreaction as theonly source of contrarian profits.