Short-Horizon Return Reversals and the Bid-Ask Spread

Abstract

We show that the pattern of short-term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. We develop additional testable implications of these models and document supporting evidence. Our findings indicate that to a large extent the short-horizon return reversals can be explained by dealer-inventory-related market microstructure effects.

JEL Classification: G14, G20