Foster School of Business, University of Washington 2014. 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.
ASJC Scopus subject areas
- Economics and Econometrics