Short-term reversals, short-term momentum, and news-driven trading activity

I-Hsuan Ethan Chiang, Chris Kirby and Ziye Zoe Nie

Journal of Banking & Finance, 2021, vol. 125, issue C

Abstract: We find no evidence of monthly return reversals for the top quintile of small- and large-cap stocks ranked by turnover. Indeed, stocks in the top decile of turnover display short-term momentum. We argue that these findings arise from a combination of effects. First, short-term reversals stem from short-term liquidity demands. Second, news-driven returns tend to continue rather than reverse. Third, turnover acts as a proxy for both liquidity and news-driven trading activity. The evidence suggests that reversals give way to momentum as turnover increases because high-turnover stocks are more liquid than low-turnover stocks and their returns are more reflective of news-driven trading activity. For example, the correlation between the monthly returns of stocks that announce earnings during the month and their announcement-window returns increases with monthly turnover. Furthermore, sorting stocks into turnover-based portfolios that are rebalanced monthly leads to a disproportionate number of stocks with earnings announcements in the high-turnover portfolios.

Keywords: Turnover; Information diffusion; Liquidity; Return continuations; Post earnings announcement drift; Cross-section of expected returns (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:125:y:2021:i:c:s0378426621000261

DOI: 10.1016/j.jbankfin.2021.106068

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