Intraday Residual Reversal in the U.S. Stock Market

Abstract

Li et al. (2023) show that intraday risk factor exposure leads to predictable returns. In this paper, we focus on the unexplained price movements from the factor-based intraday model. We document an economically large and statistically significant return reversal based on the previous period’s residual return. This residual reversal strategy, which buys stocks with negative residuals and sells stocks with positive residuals, earns an annualized return of 162.3%. The strategy captures the returns to liquidity provision to the transitory component of stock returns.

Keywords: Residual Reversal, Market Efficiency, Intraday Market, Trading Strategy

JEL Classification: G11, G12, G14