Reversals and the Returns to Liquidity Provision

64 Pages Posted: 27 Jan 2023

See all articles by Wei Dai

Wei Dai

Dimensional Fund Advisors

Mamdouh Medhat

Dimensional Fund Advisors

Robert Novy-Marx

Simon Business School, University of Rochester; National Bureau of Economic Research (NBER)

Savina Rizova

Dimensional Fund Advisors

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2023

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

Suggested Citation

Dai, Wei and Medhat, Mamdouh and Novy-Marx, Robert and Rizova, Savina, Reversals and the Returns to Liquidity Provision (January 26, 2023). Available at SSRN: https://ssrn.com/abstract=4339591 or http://dx.doi.org/10.2139/ssrn.4339591

Wei Dai

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

Mamdouh Medhat

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

HOME PAGE: http://https://sites.google.com/site/mamdouhmedhatresearch/home

Robert Novy-Marx (Contact Author)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Savina Rizova

Dimensional Fund Advisors ( email )

6300 Bee Cave Road, Building One
Austin, TX 78746
United States

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