Reversal Returns and Expected Returns from Liquidity Provision: Evidence from Emerging Markets

64 Pages Posted: 1 Feb 2018 Last revised: 12 Oct 2020

See all articles by Hilal Anwar Butt

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi

Kenneth Högholm

Hanken School of Economics - Department of Finance and Statistics

Mohsin Sadaqat

National University of Sciences and Technology (NUST)

Date Written: January 20, 2018

Abstract

In this study, we document, for a number of emerging markets, that positive returns can be obtained using a short-term reversal strategy. Further, as expected, these returns are higher for small and illiquid firms, and the highest for more volatile firms. Overall, the reversal strategy-based alphas are significant when accessed through different asset pricing models. Our results provide, however, an important unexplored explanation; that the reversal return is higher when the market volatility is high and pronounced for the stocks that witness higher active investor exits. These findings reconcile with the notion that the reversal returns proxy the expected returns from liquidity provision in adverse times.

Keywords: Asset Pricing, Emerging Markets, Illiquidity, Risk Adjusted Returns, Short-Term Reversal, Size, Volatility

JEL Classification: G11, G12

Suggested Citation

Butt, Hilal Anwar and Högholm, Kenneth and Sadaqat, Mohsin, Reversal Returns and Expected Returns from Liquidity Provision: Evidence from Emerging Markets (January 20, 2018). Available at SSRN: https://ssrn.com/abstract=3105846 or http://dx.doi.org/10.2139/ssrn.3105846

Hilal Anwar Butt

University of Karachi - Institute of Business Administration (IBA), Karachi ( email )

University Road
Karachi, Sindh 75270
Pakistan

Kenneth Högholm

Hanken School of Economics - Department of Finance and Statistics ( email )

P.O. Box 287
FIN-65101 Vasa
Finland

Mohsin Sadaqat (Contact Author)

National University of Sciences and Technology (NUST) ( email )

Pakistan

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