A Closer Look at the Short-Term Return Reversal

Zhi Da (), Qianqiu Liu () and Ernst Schaumburg ()
Additional contact information
Zhi Da: Finance Department, Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556
Qianqiu Liu: Shidler College of Business, University of Hawaii, Honolulu, Hawaii 96822
Ernst Schaumburg: Federal Reserve Bank of New York, New York, New York 10045

Management Science, 2014, vol. 60, issue 3, 658-674

Abstract: Stock returns unexplained by “fundamentals,” such as cash flow news, are more likely to reverse in the short run than those linked to fundamental news. Making novel use of analyst forecast revisions to measure cash flow news, a simple enhanced reversal strategy generates a risk-adjusted return four times the size of the standard reversal strategy. Importantly, isolating the component of past returns not driven by fundamentals provides a cleaner setting for testing existing theories of short-term reversals. Using this approach, we find that both liquidity shocks and investor sentiment contribute to the observed short-term reversal, but in different ways: Specifically, the reversal profit is attributable to liquidity shocks on the long side because fire sales more likely demand liquidity, and it is attributable to investor sentiment on the short side because short-sale constraints prevent the immediate elimination of overvaluation. This paper was accepted by Brad Barber, finance.

Keywords: short-term return reversal; liquidity; sentiment; fundamental news (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (50)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2013.1766 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:60:y:2014:i:3:p:658-674

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().