Short-Term Reversals: The Effects of Institutional Exits and Past Returns
56 Pages Posted: 3 Feb 2014 Last revised: 2 Jun 2015
Date Written: October 26, 2014
Abstract
Return reversals depend on de facto market making by active informed investors as well as uninformed market makers. Accordingly, we find that reversals are higher following declines in the number of active institutional investors. Price declines over the past quarter, which serve as a proxy for declines in active investors, lead to stronger reversals across the subsequent two months; indeed reversals are concentrated primarily in past quarter losers. We provide evidence that price pressure induced by fire sales in response to past stock price drops cannot fully account for our results. Further, the evidence is consistent with market makers reacting more quickly to changes in the number of informed investors in the more recent period, particularly for large firms.
Keywords: monthly reversals, market efficiency, liquidity
JEL Classification: G1, G12, G14
Suggested Citation: Suggested Citation