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Alternative reversal variable

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  • Nguyen, Anh Duy

Abstract

In constructing a reversal variable, we tend to ignore the strong momentum in individual stock returns. A simple subtraction of the average of the past 12-month return from the previous month return allows us to alleviate the momentum return. Consequently, the reversals are significantly stronger. We also find that market states have a significant impact on reversal profit indirectly through the momentum effect. In the ‘down’ market, when the momentum effect appears weak, the profit of reversal strategy is significantly higher than in the ‘up’ market, when the momentum effect is strong.

Suggested Citation

  • Nguyen, Anh Duy, 2020. "Alternative reversal variable," Finance Research Letters, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:finlet:v:33:y:2020:i:c:s1544612319300856
    DOI: 10.1016/j.frl.2019.06.025
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    Cited by:

    1. Li, Yan & Huo, Jiale & Xu, Yongan & Liang, Chao, 2023. "Belief-based momentum indicator and stock market return predictability," Research in International Business and Finance, Elsevier, vol. 64(C).
    2. Wang, Jun & Song, Xiuna, 2022. "The effect of limited attention and risk attitude on left-tail reversal: Empirical results from a-share data in China," Finance Research Letters, Elsevier, vol. 46(PA).

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    More about this item

    Keywords

    Asset pricing models; Short-term reversal; Momentum; Anomalies; Market states;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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