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Short-term residual reversal

Author

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  • Blitz, David
  • Huij, Joop
  • Lansdorp, Simon
  • Verbeek, Marno

Abstract

Conventional short-term reversal strategies exhibit dynamic exposures to the Fama and French (1993) factors. We develop a novel reversal strategy based on residual stock returns that does not exhibit these exposures and consequently earns risk-adjusted returns that are twice as large as those of a conventional reversal strategy. Residual reversal strategies generate statistically and economically significant profits net of trading costs, even when we restrict our sample to large-cap stocks over the post-1990 period. Our results are inconsistent with the notion that reversal effects are the result of trading frictions or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.

Suggested Citation

  • Blitz, David & Huij, Joop & Lansdorp, Simon & Verbeek, Marno, 2013. "Short-term residual reversal," Journal of Financial Markets, Elsevier, vol. 16(3), pages 477-504.
  • Handle: RePEc:eee:finmar:v:16:y:2013:i:3:p:477-504
    DOI: 10.1016/j.finmar.2012.10.005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Zaremba, Adam & Long, Huaigang & Karathanasopoulos, Andreas, 2019. "Short-term momentum (almost) everywhere," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    2. Anh Duy Nguyen, 2020. "Alternative reversal variable," Post-Print hal-02388743, HAL.
    3. Anh Nguyen, 2020. "Residual return reversals: European evidences," Post-Print hal-02493457, HAL.
    4. Nguyen, Anh Duy, 2019. "Residual return reversals: European evidence," Research in International Business and Finance, Elsevier, vol. 50(C), pages 392-397.
    5. Hannah Lea Hühn & Hendrik Scholz, 2018. "Alpha Momentum and Price Momentum," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 6(2), pages 1-28, May.
    6. Anh Duy Nguyen, 2019. "Alternative reversal variable," Working Papers hal-02388743, HAL.

    More about this item

    Keywords

    Short-term reversal; Dynamic risks; Residual returns; Trading costs; Market efficiency;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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