A Volatility Based Contrarian Strategy In the German Stock Market

Abstract: In this paper we investigate if the German implied volatility index, VDAX, could be used as a good sentiment indicator for a contrarian strategy. For such a strategy to be legitimate there must exist price inefficiencies in the market, which requires that the efficient market hypothesis does not hold. We compare broader index-based contrarian strategies with a buy and hold strategy in the German stock index DAX from 1992-2012. The results shows that the contrarian strategy performs better in bearish periods but that it does not outperform the buy and hold strategy in the overall sample period.