Short-Term Residual Reversal
Robeco Asset Management - Quantitative Strategies
Erasmus University - Rotterdam School of Management; Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)
Simon D. Lansdorp
Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar
October 26, 2012
Conventional short-term reversal strategies exhibit dynamic exposures to the Fama and French (1993) factors. We develop a novel reversal strategy based on residual stock returns that does not exhibit these exposures and consequently earns risk-adjusted returns that are twice as large as those of a conventional reversal strategy. Residual reversal strategies generate statistically and economically significant profits net of trading costs, even when we restrict our sample to large-cap stocks over the post-1990 period. Our results are inconsistent with the notion that reversal effects are the result of trading frictions or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.
Number of Pages in PDF File: 50
Keywords: short-term reversal, dynamic risks, residual returns, trading costs, market efficiency
JEL Classification: G11, G12, G14
Date posted: August 18, 2011 ; Last revised: November 1, 2012
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