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Short-Term Residual Reversal

50 Pages Posted: 18 Aug 2011 Last revised: 1 Nov 2012

David Blitz

Robeco Asset Management - Quantitative Strategies

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Simon Lansdorp

Robeco Quantitative Strategies; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: October 26, 2012

Abstract

Conventional short-term reversal strategies exhibit dynamic exposures to the Fama and French (1993) factors. We develop a novel reversal strategy based on residual stock returns that does not exhibit these exposures and consequently earns risk-adjusted returns that are twice as large as those of a conventional reversal strategy. Residual reversal strategies generate statistically and economically significant profits net of trading costs, even when we restrict our sample to large-cap stocks over the post-1990 period. Our results are inconsistent with the notion that reversal effects are the result of trading frictions or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.

Keywords: short-term reversal, dynamic risks, residual returns, trading costs, market efficiency

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David and Huij, Joop and Lansdorp, Simon and Verbeek, Marno, Short-Term Residual Reversal (October 26, 2012). Available at SSRN: https://ssrn.com/abstract=1911449 or http://dx.doi.org/10.2139/ssrn.1911449

David Blitz

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Joop Huij

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco Quantitative Strategies

Rotterdam, 3011 AG
Netherlands

HOME PAGE: http://www.robeco.com/quant

Simon Lansdorp (Contact Author)

Robeco Quantitative Strategies ( email )

Rotterdam, 3011 AG
Netherlands

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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