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
We provide evidence that stocks in a momentum portfolio, which contribute to momentum profits, do not experience reversal in the long run. Conversely, stocks in the momentum portfolio, which do not exhibit relative strength in the short run, exhibit reversals in the long run. Merging these separate subgroups of securities into a single portfolio causes momentum and reversal patterns to appear linked. We show that stocks with momentum can be separated from those that exhibit reversal using stock characteristics. And, a portfolio that isolates momentum stocks displays large and persistent returns, despite the fact that these securities should be associated with low limits-to-arbitrage. In addition, these returns do not vary with behavioral proxies. The evidence on momentum returns appears to be more consistent with differences in expected returns, rather than models that assume initial mispricing and long-term correction.
Number of Pages in PDF File: 55
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: February 28, 2014
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