Reversals and the Returns to Liquidity Provision

Abstract

Different aspects of liquidity impact the performance of short-run reversals in different ways, consistent with the predictions of microstructure models. Higher volatility is associated with faster, initially stronger reversals, while lower turnover is associated with more persistent, ultimately stronger reversals. These facts also hold outside the US and explain several seemingly disparate
results in the literature.

Keywords: Liquidity, reversals, momentum, volatility, turnover

JEL Classification: G10, G12