Abstract

http://ssrn.com/abstract=1914629
 
 

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One-Month Individual Stock Return Reversals and Industry Return Momentum


Marc William Simpson


Northern Illinois University

Emiliano Giudici


affiliation not provided to SSRN

John T. Emery


affiliation not provided to SSRN

August 22, 2011


Abstract:     
There is a large stream of literature that documents one-month return reversal patterns for individual stocks. Some studies term this reversal pattern overreaction, while others simply skip one-month returns in order to examine longer term momentum patterns in stocks. At the same time, the literature documents that momentum patterns in stock returns tend to be related to momentum patterns in returns to industry portfolios. Further, industry portfolios tend to exhibit return momentum, even at one-month horizons. This paper examines the relationship between individual stock return reversals and industry momentum. We find that individual stock return reversals tend to be related to return reversions within industries. Thus, the predictions of the overreaction hypothesis do not hold, market-wide, but rather within industries. This leads to a dramatically different trading strategy than those suggested by either the overreaction hypothesis or by industry momentum. That is, a strategy that buys the losers within the previous month’s winning industry and shorts the winners in the previous month’s losing industry significantly outperforms an overreaction-based strategy that simply buys losers and shorts winners in the market overall, and it outperforms a industry-momentum-based strategy that simply buys the previous month’s winning industry portfolio and shorts the previous month’s losing industry portfolio.

Number of Pages in PDF File: 10

Keywords: Return Reversals, Industry Momentum, Short-term

JEL Classification: G00

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Date posted: August 22, 2011 ; Last revised: October 9, 2011

Suggested Citation

Simpson, Marc William and Giudici, Emiliano and Emery, John T., One-Month Individual Stock Return Reversals and Industry Return Momentum (August 22, 2011). Available at SSRN: http://ssrn.com/abstract=1914629 or http://dx.doi.org/10.2139/ssrn.1914629

Contact Information

Marc W. Simpson (Contact Author)
Northern Illinois University ( email )
1425 W. Lincoln Hwy
Dekalb, IL 60115-2828
United States
Emiliano Giudici
affiliation not provided to SSRN ( email )
John T. Emery
affiliation not provided to SSRN ( email )
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