Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60892
Authors: 
Da, Zhi
Liu, Qianqiu
Schaumburg, Ernst
Year of Publication: 
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

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