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Mean Reversion of Short-Horizon Stock Returns: Asymmetry Property

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  • Kiseok Nam

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  • Sei-Wan Kim
  • Augustine. Arize
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    Abstract

    In this paper, we explore nonlinearity inherent in short-horizon return dynamics, which is characterized by an asymmetric mean-reverting property. Over the period of 1962:07–2003:12, both daily and weekly returns of three market indexes and individual stock returns exhibit a strong asymmetric reverting pattern in which a negative return reverts more quickly, with a greater reverting magnitude, than positive returns revert to negative returns. The observed asymmetric reverting pattern is not justified under the positive relationship between future volatility and risk premium, which is a key presumption in the time-varying rational expectation hypothesis. The asymmetric reverting behavior of stock returns explored by this paper corroborates the argument for the relative performance of “winner'' and “loser'' stocks that has been documented by contrarian literature. Copyright Springer Science + Business Media, Inc. 2006

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 26 (2006)
    Issue (Month): 2 (March)
    Pages: 137-163

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    Handle: RePEc:kap:rqfnac:v:26:y:2006:i:2:p:137-163

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

    Related research

    Keywords: short-horizon stock returns; asymmetric reverting pattern; short-run contrarian profits;

    References

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    Cited by:
    1. Warren Dean & Robert Faff, 2008. "Evidence of feedback trading with Markov switching regimes," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 133-151, February.
    2. Bharat Kolluri & Mahmoud Wahab, 2008. "Stock returns and expected inflation: evidence from an asymmetric test specification," Review of Quantitative Finance and Accounting, Springer, vol. 30(4), pages 371-395, May.
    3. Kwang-il Choe & Joshua Krausz & Kiseok Nam, 2011. "Technical trading rules for nonlinear dynamics of stock returns: evidence from the G-7 stock markets," Review of Quantitative Finance and Accounting, Springer, vol. 36(3), pages 323-353, April.
    4. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.

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