Re-examining Reversals in Monthly Stock Returns: Post-Discovery, Size-based, and Time-Variation Evidence

43 Pages Posted: 18 Aug 2011 Last revised: 3 Jun 2013

See all articles by Chris T. Stivers

Chris T. Stivers

University of Louisville

Licheng Sun

Old Dominion University

Date Written: May 31, 2013

Abstract

We re-examine contrarian relative-strength profits in one-month stock returns with a focus on: (1) the post-discovery vs.pre-discovery evidence, (2) size-based variation, and (3) time-series patterns. Over the last two decades since the initial documentation in the academic literature, profits to the one-month relative-strength contrarian strategy appear to have weakened substantially. In fact, reversals for this strategy are only evident for small-cap stocks in the post-discovery sample. Further, we find that the reversal profits are reliably higher following periods of high realized stock market volatility; where, following from Nagel (2012), we interpret the lagged return volatility as a state variable that indicates time-variation in the return to liquidity provision. We also find that the reversals are much stronger in January for both the pre-and post-discovery periods. For the post-discovery period, only the small-cap stocks exhibit reliable reversals for the non-January months. Our collective findings suggests that the one-month relative-strength strategy can be characterized as a weakening illiquidity-related phenomenon.

Keywords: contrarian strategies, monthly stock returns, January seasonality

JEL Classification: G14

Suggested Citation

Stivers, Chris T. and Sun, Licheng, Re-examining Reversals in Monthly Stock Returns: Post-Discovery, Size-based, and Time-Variation Evidence (May 31, 2013). Available at SSRN: https://ssrn.com/abstract=1911506 or http://dx.doi.org/10.2139/ssrn.1911506

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

Licheng Sun

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

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