Short-Term Reversals: The Effects of Institutional Exits and Past Returns

56 Pages Posted: 3 Feb 2014 Last revised: 2 Jun 2015

See all articles by Si Cheng

Si Cheng

Chinese University of Hong Kong - Department of Finance

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 26, 2014

Abstract

Return reversals depend on de facto market making by active informed investors as well as uninformed market makers. Accordingly, we find that reversals are higher following declines in the number of active institutional investors. Price declines over the past quarter, which serve as a proxy for declines in active investors, lead to stronger reversals across the subsequent two months; indeed reversals are concentrated primarily in past quarter losers. We provide evidence that price pressure induced by fire sales in response to past stock price drops cannot fully account for our results. Further, the evidence is consistent with market makers reacting more quickly to changes in the number of informed investors in the more recent period, particularly for large firms.

Keywords: monthly reversals, market efficiency, liquidity

JEL Classification: G1, G12, G14

Suggested Citation

Cheng, Si and Hameed, Allaudeen and Subrahmanyam, Avanidhar and Titman, Sheridan, Short-Term Reversals: The Effects of Institutional Exits and Past Returns (October 26, 2014). Journal of Financial and Quantitative Analysis (JFQA), 2016. Available at SSRN: https://ssrn.com/abstract=2389408 or http://dx.doi.org/10.2139/ssrn.2389408

Si Cheng

Chinese University of Hong Kong - Department of Finance ( email )

12/F, Cheng Yu Tung Building
No.12, Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.bschool.cuhk.edu.hk/index.php/faculty-staff/show-alltest?pid=496&sid=3939:Cheng-Si

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.bschool.nus.edu.sg/staff_profile/cv.asp?ID=3

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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