Report
Decomposing short-term return reversal
Liu, Qianqiu; Da, Zhi; Schaumburg, Ernst (2011)
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 ...
Staff Reports , Paper 513