Short-term residual reversal

David Blitz, Joop Huij, Simon Lansdorp and Marno Verbeek

Journal of Financial Markets, 2013, vol. 16, issue 3, 477-504

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.

Keywords: Short-term reversal; Dynamic risks; Residual returns; Trading costs; Market efficiency (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:16:y:2013:i:3:p:477-504

DOI: 10.1016/j.finmar.2012.10.005

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