Asymmetric Reversals

Federico Baldi-Lanfranchi, Pierre Collin-Dufresne and Kent Daniel

No 21967, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Short-term return reversal is one of the most robust asset-pricing anomalies, and is commonly linked to liquidity provision. We decompose individual firm stock returns into two distinct components: SYS, the component of returns that can be linked to systematic risk and public information releases; and an orthogonal residual RES. The RES component reverses, while the SYS component exhibits continuation. Moreover, the residual reversals are highly asymmetric: positive residual shocks reverse much more slowly than negative shocks. A return factor based on asymmetric idiosyncratic reversal subsumes the idiosyncratic volatility factor and a broad set of other short-horizon anomalies. Our findings suggest that asymmetric idiosyncratic reversal (AIR) is the primary driver of short-term return predictability.

JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2026-09
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