Rethinking reversals

Timothy C. Johnson

Journal of Financial Economics, 2016, vol. 120, issue 2, 211-228

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.

Keywords: Stock market autocorrelation; Peer effects; Disagreement (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:120:y:2016:i:2:p:211-228

DOI: 10.1016/j.jfineco.2016.01.026

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