When are contrarian profits due to stock market overreaction? Andrew W. Lo and A. Craig MacKinlay Contrarian investment strategies may yield positive expected profits without being due to stock market overreaction. Even if individual security returns are temporally independent, portfolio strategies that exploit return reversals may still earn positive expected profits. This is due to the effects of cross-autocovariances from which contrarian strategies inadvertently benefit. The authors provide an informal taxonomy of return-generating processes that yield positive [and negative] expected profits under a particular contrarian portfolio strategy, and use this taxonomy to reconcile the empirical findings of weak negative autocorrelation for returns on individual stocks with the strong positive autocorrelation of portfolio returns. They present empirical evidence against overreaction as the primary source of contrarian profits, and show the presence of important lead-lag relations across securities. The profitability of contrarian portfolio strategies is a consequence of positive cross-autocovariances across securities, not necessarily negative autocorrelation in individual security returns. The authors show that the positive autocorrelation in weekly returns indexes is completely attributable to cross-effects. They also find that the returns of large capitalization stocks almost always lead those of smaller stocks. This result indicates that the recently documented positive autocorrelation in weekly returns indexes is completely attributable to cross-effects. The authors show that these cross-autocorrelations are inconsistent with a return-generating process that is the sum of a positively autocorrelated common factor plus an idiosyncratic bid-ask spread process. However, this is a negative result, as it does not provide guidance for theoretical models of equilibrium asset prices attempting to explain positive index autocorrelation via time-varying conditional expected returns. The authors focus on the expected profits of the contrarian investment rule and not on its risk. Their results have implications for stock market efficiency only insofar as they provide restrictions on economic models that might be consistent [or inconsistent] with the empirical results. They do not assert or deny the existence of “excessive” contrarian profits. Such an issue cannot be addressed without specifying an economic paradigm within which asset prices are rationally determined in equilibrium. However, they have found the contrarian investment strategy to be a convenient tool in exploring the autocorrelation properties of stock returns. Moreover, their analysis of the nature of expected profits does point to more specific sources of risk for contrarian strategies that must be weighed in assessing market efficiency. They leave this more ambitious task to future research. The authors summarize the autocorrelation properties of daily, weekly and monthly returns, documenting the positive dependence in portfolio returns and the negative autocorrelations of individual returns. They present a formal analysis of the expected profits from a specific contrarian investment strategy under several different return-generating mechanisms, and show how positive expected profits need not be related to overreaction. They attempt to empirically quantify the proportion of contrarian profits that may be attributed to overreaction andWhen are contrarian profits due to stock market overreaction? Andrew W. Lo and A. Craig MacKinlay Contrarian investment strategies may yield positive expected profits without being due to stock market overreaction. Even if individual security returns are temporally independent, portfolio strategies that exploit return reversals may still earn positive expected profits. This is due to the effects of cross-autocovariances from which contrarian strategies inadvertently benefit. The authors provide an informal taxonomy of return-generating processes that yield positive [and negative] expected profits under a particular contrarian portfolio strategy, and use this taxonomy to reconcile the empirical findings of weak negative autocorrelation for returns on individual stocks with the strong positive autocorrelation of portfolio returns. They present empirical evidence against overreaction as the primary source of contrarian profits, and show the presence of important lead-lag relations across securities. The profitability of contrarian portfolio strategies is a consequence of positive cross-autocovariances across securities, not necessarily negative autocorrelation in individual security returns. The authors show that the positive autocorrelation in weekly returns indexes is completely attributable to cross-effects. They also find that the returns of large capitalization stocks almost always lead those of smaller stocks. This result indicates that the recently documented positive autocorrelation in weekly returns indexes is completely attributable to cross-effects. The authors show that these cross-autocorrelations are inconsistent with a return-generating process that is the sum of a positively autocorrelated common factor plus an idiosyncratic bid-ask spread process. However, this is a negative result, as it does not provide guidance for theoretical models of equilibrium asset prices attempting to explain positive index autocorrelation via time-varying conditional expected returns. The authors focus on the expected profits of the contrarian investment rule and not on its risk. Their results have implications for stock market efficiency only insofar as they provide restrictions on economic models that might be consistent [or inconsistent] with the empirical results. They do not assert or deny the existence of “excessive” contrarian profits. Such an issue cannot be addressed without specifying an economic paradigm within which asset prices are rationally determined in equilibrium. However, they have found the contrarian investment strategy to be a convenient tool in exploring the autocorrelation properties of stock returns. Moreover, their analysis of the nature of expected profits does point to more specific sources of risk for contrarian strategies that must be weighed in assessing market efficiency. They leave this more ambitious task to future research. The authors summarize the autocorrelation properties of daily, weekly and monthly returns, documenting the positive dependence in portfolio returns and the negative autocorrelations of individual returns. They present a formal analysis of the expected profits from a specific contrarian investment strategy under several different return-generating mechanisms, and show how positive expected profits need not be related to overreaction. They attempt to empirically quantify the proportion of contrarian profits that may be attributed to overreaction and