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http://hdl.handle.net/10419/60892
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| Title: | | Decomposing short-term return reversal  |
| Authors: | | Da, Zhi Liu, Qianqiu Schaumburg, Ernst |
| Issue Date: | | 2011 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 513 |
| Abstract: | | The profit to a standard short-term return reversal strategy can be decomposed analytically into four components: 1) across-industry return momentum, 2) withinindustry 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. |
| Subjects: | | return reversal liquidity |
| JEL: | | G12 D40 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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