71 Pages Posted: 17 Apr 2018 Last revised: 9 Nov 2018
Date Written: November 8, 2018
We document a striking pattern in the cross-section of U.S. and international stock returns: Double-sorting on the previous month's return and share turnover results in strong and significant short-term reversal for low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and persistent as conventional momentum, is significant among the largest stocks, and survives transaction costs. Consistent with our model, in which turnover arises as a measure of disagreement, low-turnover reversal is due to noise trading whereas high-turnover momentum reflects gradual information diffusion. Consequently, purging noise trades from the previous month's return and turnover generates even stronger short-term momentum.
The figure shows average returns to three strategies that buy the previous month’s winners and short the previous month’s losers: A conventional short-term reversal strategy; a short-term reversal* strategy that trades in low-turnover stocks; and a short-term momentum strategy that trades in high-turnover stocks.
Keywords: Momentum, reversal, disagreement, informed trading, return predictability
JEL Classification: G12, G14
Suggested Citation: Suggested Citation