Reversal of 3-Day Losers and Continuation of 3-Day Winners on the NASDAQ

Abstract

Using only the 200 large-cap securities that make up the NYSE 100 and NASDAQ 100, this study investigates 130 randomly selected, 3-day formation periods from January 2000 through December 2012 (3,269 trading days). During these formation periods, the three worst and three best performing stocks (based on excess return) are flagged. Once flagged, the subsequent 10-day holding period excess returns are calculated. Results indicate that, on either exchange, investors can outperform the market by going long the stocks that have experienced an excessive 3-day loss. Beyond that, investors can also outperform the market by going long the stocks that have experienced and excessive 3-day gain, however, this result only holds true for NASDAQ securities. Results are robust to the number of best and worst stocks that are flagged. Results are also robust to other combinations of formation and holding period lengths.

Keywords: Return Reversal, Return Persistence, Trading Strategy, Market Anomaly

JEL Classification: G12, G14