Report
Decomposing short-term return reversal
Abstract: The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) within-industry variation in expected returns, 3) under-reaction to within-industry cash flow news, and 4) a residual. Only the residual component, which isolates reaction to recent ?nonfundamental? price changes, is significant and positive in the data. A simple short-term return reversal trading strategy designed to capture the residual component generates a highly significant risk-adjusted return three times the size of the standard reversal strategy during our 1982-2009 sampling period. Our decomposition suggests that short-term return reversal is pervasive, much greater than previously documented, and driven by investor sentiment on the short side and liquidity shocks on the long side.
Access Documents
File(s): File format is text/html https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr513.html
File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr513.pdf
Authors
Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2011
Number: 513