Momentum and Reversal: Does What Goes Up Always Come Down?
Jennifer S. Conrad
University of North Carolina Kenan-Flagler Business School
M. Deniz Yavuz
Purdue University - Krannert School of Management
February 25, 2014
Stocks in a momentum portfolio, which contribute to momentum profits, do not experience reversal in the long run. Conversely, stocks that do not contribute to momentum exhibit reversals. Merging these separate securities into a single portfolio causes momentum and reversal patterns to appear linked. Stocks with momentum can be separated from those that exhibit reversal using stock characteristics. A portfolio that isolates momentum stocks is associated with low limits-to-arbitrage but displays large and persistent returns, which do not vary with behavioral proxies. Our results provide some direction for potential explanations of momentum patterns in returns.
Number of Pages in PDF File: 48
Keywords: Momentum, reversal, return predictability, behavioral finance, expected returns, stock chracteristics
JEL Classification: G10, G11, G12, G14, D03working papers series
Date posted: February 26, 2012 ; Last revised: January 9, 2015
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