SHARES: What if someone were to tell you that Irish shares moved in a way that allowed an investor to exploit some systematic behaviour? Mr Liam Gallagher and Mr Cormac O'Keeffe of the Department of Economics in University College Cork claim to have established exactly that in their paper, The Winner-Loser Anomaly: Robust Evidence From Irish Shares.

In considering more than 10 years of data on Irish shares, there are substantial rewards (in terms of return) to investors if they follow general rules, the paper states.

"Shares do well for two years followed by poor performance in the following year."

The two general rules, according to the economists, are:

1. Buy shares that did well over the past year but did poorly the preceding year.

2. Do not hold onto shares that have done well over the last two years.

The paper examines the success of pursuing a contrarian investment strategy for Irish shares.

This involves buying stocks that have performed poorly ("losers") and selling those that have performed well ("winners") over a specified period.

As an alternative investment strategy, Mr Gallagher and Mr O'Keeffe also examined the performance of the strength rule strategy, which suggests buying past winners and selling past losers.

They tested the performance of both strategies when applied to the top 16 Irish shares for the period 1988 to 2000 and went on to develop a hybrid strategy that combined these two strategies.

The results suggest there is a significant degree of predictability in stock market returns, the paper concludes.

The pattern in stock returns may arise as a result of investors following a strength rule.

"After prices rising substantially, investors begin to cash in and this profit-taking brings the price back down, making the stock a loser again," says Mr Gallagher.

He refers to this as similar to a bandwagon effect. The faster and greater that prices rise, the faster they move back.

The strength rule implies a large over-reaction effect that is corrected quickly in the following year before recovering again. This is where the three-year cycle emerges.

The next stage of Mr Gallagher's research is to examine why the Irish market is particularly prone to this kind of pattern.

"I am looking into the link between the stock price pattern and the dominant position of the two leading brokers in Ireland," he said.