Economic Policy Uncertainty and Short-term Reversals

This chapter finds that short-term reversals become more profound in the current month when economic policy uncertainty is larger in the prior month. There is evidence that the economic policy uncertainty influences return reversals through the liquidity channel. Short-term reversal profits are also positively related to the VIX index, the Baker–Wurgler (2007) investor sentiment index, and the Aruoba–Diebold–Scotti (2009) business conditions index in the prior month. Though, the predictability of the latter two indexes is less robust. However, adding these indexes and other variables does not weaken the relationship between economic policy uncertainty and return reversals.