Short-Term Residual Reversal

D Blitz, Joop Huij, SD (Simon) Lansdorp, Marno Verbeek

Research output: Contribution to journalArticleAcademic

22 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)477-504
Number of pages28
JournalJournal of Financial Markets
Volume16
Issue number3
DOIs
Publication statusPublished - 2013

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