Momentum and Short-Term Reversals: Theory and Evidence

74 Pages Posted: 30 Mar 2022 Last revised: 12 Sep 2022

See all articles by Narasimhan Jegadeesh

Narasimhan Jegadeesh

Emory University - Department of Finance

Jiang Luo

Nanyang Business School, Nanyang Technological University

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: March 29, 2022

Abstract

How might markets exhibit both short-term reversals and longer-term momentum? Motivated by this question, we develop a dynamic model which includes noise traders and investors who underreact to signals that they do not themselves produce. Our setting implies the following: Return predictability transitions from reversals to weak predictability to momentum as the lag horizon lengthens. Short-term reversals weaken following earnings announcements, and increase when retail trading is higher. These predictions are supported empirically. If noise trader demands are positively autocorrelated, our model generates sharp buildups and collapses of stock prices as in the recent GameStop episode.

Keywords: momentum, reversals, noise traders, liquidity, GameStop

JEL Classification: G02, G12, G14

Suggested Citation

Jegadeesh, Narasimhan and Luo, Jiang and Subrahmanyam, Avanidhar and Titman, Sheridan, Momentum and Short-Term Reversals: Theory and Evidence (March 29, 2022). Nanyang Business School Research Paper No. 22-13, Available at SSRN: https://ssrn.com/abstract=4069575 or http://dx.doi.org/10.2139/ssrn.4069575

Narasimhan Jegadeesh

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Jiang Luo

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

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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