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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
    Head of Factor Investing Equities and Factor Index Research
  • Simon Lansdorp
    Simon
    Lansdorp
    Portfolio Manager
  • David Blitz
    David
    Blitz
    Head of Quant Research

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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