Short-Term Momentum and Reversals in Large Stocks

43 Pages Posted: 27 Mar 2012 Last revised: 11 May 2012

See all articles by Jason Zhanshun Wei

Jason Zhanshun Wei

University of Toronto - Rotman School of Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: May 9, 2012

Abstract

Using stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study demonstrates that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. Our finding is in sharp contrast with those in the existing literature which mostly documents and explains momentum and reversals for different horizons. As such, our study not only offers fresh, new empirical findings on cross-section return predictability but also poses a challenge to the existing theoretical paradigms that are tailored to sequential occurrence of momentum and reversals. Specifically, we contribute to the literature by 1) uncovering a new empirical regularity which explains why large stocks are generally associated with no or weak momentum in the short-term, and 2) advancing a theoretical model based on "moderated confidence" which can rationalize empirical findings such as the one in the current paper where underreaction and overreaction can occur simultaneously with the same investor.

Keywords: momentum, reversals, return predictability, firm size, volatility, moderated confidence, underreaction, overreaction

JEL Classification: G10, G12, G14

Suggested Citation

Wei, Jason Zhanshun and Yang, Liyan, Short-Term Momentum and Reversals in Large Stocks (May 9, 2012). Available at SSRN: https://ssrn.com/abstract=2029984 or http://dx.doi.org/10.2139/ssrn.2029984

Jason Zhanshun Wei

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3698 (Phone)
416-971-3048 (Fax)

Liyan Yang (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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