Decomposing Short-Term Return Reversal

44 Pages Posted: 12 Feb 2010 Last revised: 30 Aug 2011

See all articles by Zhi Da

Zhi Da

University of Notre Dame - Mendoza College of Business

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2011

Abstract

The profit to a standard short-term return reversal strategy can be decomposed analytically into four components related to (1) across-industry return momentum; (2) within-industry variation in expected returns; (3) underreaction to within-industry cash flow news; (4) and a residual. Only the residual component, which isolates reaction to recent "non-fundamental" price changes, is significant and positive in the data. A simple short-term return reversal trading strategy designed to capture the residual component generates a highly significant risk-adjusted return three times the size of the standard reversal strategy during our 1982-2009 sampling period. Our decomposition suggests that short-term return reversal is pervasive, much greater than previously documented, and driven by investor sentiment on the short-side and liquidity shocks on the long-side.

Keywords: return reversal, liquidity, cash flows, discount rate

JEL Classification: G12

Suggested Citation

Da, Zhi and Liu, Qianqiu and Schaumburg, Ernst, Decomposing Short-Term Return Reversal (August 25, 2011). Available at SSRN: https://ssrn.com/abstract=1551025 or http://dx.doi.org/10.2139/ssrn.1551025

Zhi Da (Contact Author)

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way, E602f
Honolulu, HI 96822
United States
808-956-8736 (Phone)
808-956-9887 (Fax)

Ernst Schaumburg

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,273
rank
10,256
Abstract Views
5,701
PlumX Metrics