A Behavioral Look on Short-term Reversal

57 Pages Posted: 6 Oct 2019 Last revised: 13 Mar 2020

See all articles by Bin Guo

Bin Guo

Nankai University - School of Finance

Shen Lin

Tianjin University - College of Management and Economics; PBCSF, Tsinghua University

Wei Zhang

Tianjin University - College of Management and Economics

Date Written: September 26, 2019

Abstract

Previous studies regard short-term reversal as compensation for liquidity risk. In this paper, we document that the reversal pattern depends on the prior realized profits that affect the risk attitude of the liquidity supplier. In the gain domain, a realized gain reduces the pain from a potential loss, making the liquidity supplier more risk-seeking. In the loss domain, a small realized loss motivates the break-even effect, but a substantial loss is too difficult to cover. Hence, there is an approximately U-shaped relation between the risk aversion of the liquidity supplier and realized loss. The empirical results confirm the asymmetric impacts of realized gain and loss on short-term reversal.

Keywords: Prospect theory, mental accounting, quasi-hedonic editing, realized profit, short-term reversal

JEL Classification: G12, G41

Suggested Citation

Guo, Bin and Lin, Shen and Zhang, Wei, A Behavioral Look on Short-term Reversal (September 26, 2019). Available at SSRN: https://ssrn.com/abstract=3459914 or http://dx.doi.org/10.2139/ssrn.3459914

Bin Guo

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

Shen Lin (Contact Author)

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

PBCSF, Tsinghua University ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Wei Zhang

Tianjin University - College of Management and Economics ( email )

Tianjin
China

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