Short-term reversals, short-term momentum, and news-driven trading activity

We find no evidence of monthly return reversals for the top quintile of small- and large-cap stocks ranked by turnover. Indeed, stocks in the top decile of turnover display short-term momentum. We argue that these findings arise from a combination of effects. First, short-term reversals stem from sh...

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Veröffentlicht in:Journal of banking & finance 2021-04, Vol.125, p.106068, Article 106068
Hauptverfasser: Chiang, I-Hsuan Ethan, Kirby, Chris, Nie, Ziye Zoe
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Sprache:eng
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Zusammenfassung:We find no evidence of monthly return reversals for the top quintile of small- and large-cap stocks ranked by turnover. Indeed, stocks in the top decile of turnover display short-term momentum. We argue that these findings arise from a combination of effects. First, short-term reversals stem from short-term liquidity demands. Second, news-driven returns tend to continue rather than reverse. Third, turnover acts as a proxy for both liquidity and news-driven trading activity. The evidence suggests that reversals give way to momentum as turnover increases because high-turnover stocks are more liquid than low-turnover stocks and their returns are more reflective of news-driven trading activity. For example, the correlation between the monthly returns of stocks that announce earnings during the month and their announcement-window returns increases with monthly turnover. Furthermore, sorting stocks into turnover-based portfolios that are rebalanced monthly leads to a disproportionate number of stocks with earnings announcements in the high-turnover portfolios.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2021.106068