Momentum and Reversal: Does What Goes Up Always Come Down?

Abstract:     
We examine whether risk characteristics of stocks interact with return continuation and reversals. We find that a momentum portfolio whose winner stocks are chosen from high expected return securities, and whose loser stocks are chosen from low expected return securities, has significant momentum profits, but shows no evidence of subsequent reversals. In contrast, a momentum portfolio that buys low expected return winners and sells high expected return losers has no significant momentum but strong reversals. Overall, we find evidence that intermediate-horizon momentum and longer-horizon reversal patterns may not be linked. Our results have implications for several explanations of momentum profits.

Number of Pages in PDF File: 44

Keywords: Momentum, reversal, return predictability, behavioral finance, expected returns, stock chracteristics

JEL Classification: G10, G11, G12, G14, D03

working papers series