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. 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 the result of trading frictions or non-synchronous trading of stocks and pose a serious challenge to rational asset pricing models.

dynamic risks, market efficiency, residual returns, short-term reversal, trading costs
Portfolio Choice; Investment Decisions (jel G11), Asset Pricing (jel G12), Information and Market Efficiency; Event Studies (jel G14)
dx.doi.org/10.1016/j.finmar.2012.10.005, hdl.handle.net/1765/40707
ERIM Top-Core Articles
Journal of Financial Markets
Erasmus Research Institute of Management

Blitz, D.C, Huij, J.J, Lansdorp, S.D, & Verbeek, M.J.C.M. (2013). Short-term residual reversal. Journal of Financial Markets, 16(3), 477–504. doi:10.1016/j.finmar.2012.10.005