Decomposing Short-Term Return Reversal
45 Pages Posted: 13 Sep 2011
There are 2 versions of this paper
Decomposing Short-Term Return Reversal
Date Written: September 1, 2011
Abstract
The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) within-industry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual component, which isolates reaction to recent “nonfundamental” 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
JEL Classification: G12, D40
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Liquidity and the Post-Earnings-Announcement Drift
By Tarun Chordia, Ronnie Sadka, ...
-
Liquidity and the Post-Earnings-Announcement Drift
By Tarun Chordia, Amit Goyal, ...
-
The Extreme Future Stock Returns Following Extreme Earnings Surprises
By Jeffrey T. Doyle, Russell J. Lundholm, ...
-
By Lawrence D. Brown and Jerry C. Y. Han
-
Information Uncertainty and Post-Earnings-Announcement-Drift
By Jennifer Francis, Ryan Lafond, ...
-
Volume, Opinion Divergence and Returns: A Study of Post-Earnings Announcement Drift