Reversal Returns and Expected Returns from Liquidity Provision: Evidence from Emerging Markets
64 Pages Posted: 1 Feb 2018 Last revised: 12 Oct 2020
Date Written: January 20, 2018
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: Suggested Citation