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.