When Are Contrarian Profits Due to Stock Market Overreaction? Andrew W.Lo Sloan School of Management Massachusetts Institute of Technology A.Craig MacKinlay Wharton School University of Pennsylvania If returns on some stocks systematically lead or lag those of otbers,a portfolio strategy that sells c“vinners”and buys "losers”can produce positive expected returns,even if no stock's returns are negatively autocorrelated as virtually all models of overreaction imply.Using a particular con- trarian strategy we sbow tbat,despite negative autocorrelation in individual stock returns,weekly portfolio returns are strongly positively autocor- related and are tbe result ofimportant cross-auto- correlations.We find that the returns of large stocks lead those of smaller stocks,and we present evidence against overreaction as the only source of contrarian profits. Since the publication of Louis Bachelier's thesis The- ory ofSpeculation in 1900,the theoretical and empir- Research support from the Batterymarch Fellowship (Lo),the Geewax.Ter- ker Research Fund (MacKinlay),the National Science Foundation (Grant No.SES-8821583),the John M.Olin Fellowship at the NBER (Lo),and the Q Group is gratefully acknowledged.The authors thank Andy Abel,Michael Brennan,Werner DeBondt,Mike Gibbons,Don Keim,Bruce Lehmann,Jay Ritter,Rob Stambaugh,a referee,and seminar participants at Harvard Uni- versity,Princeton University,the University of Alberta,the University of Maryland,the University of Minnesota,the University of Western Ontario, and the Wharton School for useful suggestions and discussion.Address reprint requests to Andrew Lo,Sloan School of Management,M.I.T.,50 Memorial Drive,Cambridge,MA 02139. The Review of Financial Studies 1990 Volume 3,number 2,pp.175-205 1990 The Review of Financial Studies 0893-9454/90/$1.50