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Short-Term Reversals: The Effects of Past Returns and Institutional Exits

Published online by Cambridge University Press:  20 February 2017

Si Cheng ,
Allaudeen Hameed ,
Avanidhar Subrahmanyam  and
Sheridan Titman
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Abstract

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Price declines over the previous quarter lead to stronger reversals across the subsequent 2 months. We explain this finding based on the dual notions that liquidity provision can influence reversals and that agents who act as de facto liquidity providers may be less active in past losers. Supporting these observations, we find that active institutions participate less in losing stocks and that the magnitude of monthly return reversals fluctuates with changes in the number of active institutional investors. Thus, we argue that fluctuations in liquidity provision with past return performance account for the link between return reversals and past returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 1 , February 2017 , pp. 143 - 173
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1 We thank an anonymous referee, Aydogan Alti, Hendrik Bessembinder (the editor), Tarun Chordia, Elroy Dimson, John Griffin, Raghu Rau, Pedro Saffi, Tao Shu, Elvira Sojli, Avi Wohl, and seminar participants at the Asian Bureau of Finance and Economic Research (ABFER) and Asian Finance Association conferences, California State University, Fullerton, Erasmus University, the Hebrew University Conference to Honor Dan Galai and Itzhak Venezia, Hong Kong University of Science and Technology, National University of Singapore, Rutgers University, Stevens Institute of Technology, the University of Cambridge, the University of Missouri–Columbia, the University of Queensland, the University of St. Gallen, and the University of Texas at Austin for helpful comments. Hameed gratefully acknowledges financial support from NUS Academic Research Grants.

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