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Short-term residual reversal

Short-term residual reversal

17-11-2011 | Research

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.

  • Joop  Huij
    Joop
    Huij
    PhD, Executive Director, Head of Factor Investing Equities and Head of Factor Index Research
  • Simon Lansdorp
    Simon
    Lansdorp
    PhD, Portfolio Manager
  • David Blitz
    David
    Blitz
    PhD, Executive Director, Head of Quant Selection Research
  • Marno Verbeek
    Marno
    Verbeek
    Dean of Research at Rotterdam School of Management, Erasmus University

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 attributable to trading frictions, liquidity, or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.

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