Co-Existence of Short-Term Reversals and Momentum in the Australian Equity Market
Posted: 29 Jan 2016
Date Written: February 1, 2016
Small stocks tend to reverse, whereas large stocks tend to trend over a one-month horizon, which explains the lack of short-term reversals in the Australian market as a whole. However, large stocks exhibit intra-industry reversals, in which industry winners underperform industry losers in the subsequent month, when controlling for price momentum. Conversely, once this intra-industry reversal is neutralised, large stocks display momentum behaviour, in which market winners outperform market losers. These conditional strategies generate positive, significant risk-adjusted returns on large stocks in Australia. This paper documents significant industry momentum, as winning industries outperform losing industries in the following month. This industry momentum effect dominates the intra-industry reversal. The paper also finds evidence that conditional reversals are driven by illiquidity and are inhibited by stock prices under-reacting to earnings announcements.
Keywords: industry momentum, liquidity, momentum, short-term reversals
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