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Industries and Stock Return Reversals

Published online by Cambridge University Press:  14 July 2014

Allaudeen Hameed  and
G. Mujtaba Mian
Allaudeen Hameed*
Affiliation:
allaudeen@nus.edu.sg, Business School, National University of Singapore, Singapore 117592, Singapore
G. Mujtaba Mian
Affiliation:
afgmm@polyu.edu.hk, School of Accounting and Finance, Hong Kong Polytechnic University, Kowloon, Hong Kong.
*
*Corresponding author: allaudeen@nus.edu.sg
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Abstract

This paper documents pervasive evidence of intra-industry reversals in monthly returns. Unlike the conventional reversal strategy based on stock returns relative to the market portfolio, we document intra-industry return reversals that are larger in magnitude, consistently present over time, and prevalent across subgroups of stocks, including large and liquid stocks. These return reversals are driven by order imbalances and noninformational shocks. Consistent with reversals representing compensation for supplying liquidity, intra-industry reversals are stronger following aggregate market declines and volatile times, reflecting binding capital constraints and limited risk-bearing capacity of liquidity providers.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 1-2 , April 2015 , pp. 89 - 117
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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