One-Month Individual Stock Return Reversals and Industry Return Momentum

10 Pages Posted: 22 Aug 2011 Last revised: 22 Jun 2016

Marc William Simpson

The John B. and Lillian E. Neff Department of Finance, University of Toledo

Emiliano Giudici

Stephen F. Austin State University - Nelson Rusche College of Business

John T. Emery

affiliation not provided to SSRN

Date Written: August 22, 2011

Abstract

There is a large stream of literature that documents one-month return reversal patterns for individual stocks. Some studies term this reversal pattern overreaction, while others simply skip one-month returns in order to examine longer term momentum patterns in stocks. At the same time, the literature documents that momentum patterns in stock returns tend to be related to momentum patterns in returns to industry portfolios. Further, industry portfolios tend to exhibit return momentum, even at one-month horizons. This paper examines the relationship between individual stock return reversals and industry momentum. We find that individual stock return reversals tend to be related to return reversions within industries. Thus, the predictions of the overreaction hypothesis do not hold, market-wide, but rather within industries. This leads to a dramatically different trading strategy than those suggested by either the overreaction hypothesis or by industry momentum. That is, a strategy that buys the losers within the previous month’s winning industry and shorts the winners in the previous month’s losing industry significantly outperforms an overreaction-based strategy that simply buys losers and shorts winners in the market overall, and it outperforms a industry-momentum-based strategy that simply buys the previous month’s winning industry portfolio and shorts the previous month’s losing industry portfolio.

Keywords: Return Reversals, Industry Momentum, Short-term

JEL Classification: G00

Suggested Citation

Simpson, Marc William and Giudici, Emiliano and Emery, John T., One-Month Individual Stock Return Reversals and Industry Return Momentum (August 22, 2011). Available at SSRN: https://ssrn.com/abstract=1914629 or http://dx.doi.org/10.2139/ssrn.1914629

Marc W. Simpson (Contact Author)

The John B. and Lillian E. Neff Department of Finance, University of Toledo ( email )

Toledo, OH 43606
United States

Emiliano Giudici

Stephen F. Austin State University - Nelson Rusche College of Business ( email )

1908 Raguet Street
McGee Business Building, Suite 137
Nacogdoches, TX 75962
United States

John T. Emery

affiliation not provided to SSRN ( email )

Paper statistics

Downloads
1,027
Rank
16,268
Abstract Views
4,174