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Rethinking reversals

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  • Johnson, Timothy C.

Abstract

High-frequency reversals are an economically important characteristic of the returns to tradeable claims to the market portfolio. This paper demonstrates that short-horizon negative autocorrelation can arise in a tractable model of agents with tournament-type preferences. Intuitively, investors act as if they are averse to missing out on a trend, causing the risk premium to move strongly counter to realized returns. The model features fully rationalizing agents, complete markets, and no exogenous transaction demand. Plausible parameterizations can match the autocorrelation in the data. Supporting evidence on novel first and second moment implications is presented.

Suggested Citation

  • Johnson, Timothy C., 2016. "Rethinking reversals," Journal of Financial Economics, Elsevier, vol. 120(2), pages 211-228.
  • Handle: RePEc:eee:jfinec:v:120:y:2016:i:2:p:211-228
    DOI: 10.1016/j.jfineco.2016.01.026
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    More about this item

    Keywords

    Stock market autocorrelation; Peer effects; Disagreement;

    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
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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