Short-Term Reversals and Longer-Term Momentum Around the World: Theory and Evidence
78 Pages Posted: 30 Mar 2022 Last revised: 27 Nov 2023
Date Written: March 29, 2022
Abstract
Stock returns exhibit reversals at short horizons but slowly transition to momentum over longer horizons. To help understand this pattern, we develop a dynamic model with short- and long-horizon noise traders, informed investors, and uninformed investors who underreact to information they do not themselves produce. The model accords with the transition from reversals to momentum, and yields the following novel predictions: (i) attenuated reversals following earnings announcements, (ii) a negative relation between momentum and reversal profits across economies and time, and (iii) larger reversals when noise trading is more volatile. Empirical analysis using U.S. and international data supports these predictions.
Keywords: momentum, reversals, noise traders, liquidity, GameStop
JEL Classification: G02, G12, G14
Suggested Citation: Suggested Citation