Asymmetric Reversals

Federico Baldi-Lanfranchi, Pierre Collin-Dufresne and Kent D. Daniel
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Federico Baldi-Lanfranchi: Lake Lucerne Institute
Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
Kent D. Daniel: Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

No 26-66, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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)
Pages: 89 pages
Date: 2026-09
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2666

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