Short-Term Return Reversals and Intraday Transactions

A new financial research paper has been published and is related to:

#31 – Short Term Reversal in Stocks

Authors: Miwa

Title: Short-Term Return Reversals and Intraday Transactions

Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3174484

Abstract:

I examine whether a short-term reversal is attributed to past intraday or overnight price movements. The results show that intraday returns significantly reverse in the following week, while overnight returns do not, indicating that the short-term reversal is attributed to past intraday price movements. In addition, the reversal of intraday returns is stronger for more illiquid stocks and during more volatile market conditions, while the reversal is unaffected by fundamental news. This result supports the view that short-term reversals are attributable mainly to price concessions for liquidity providers to absorb intraday uninformed transactions, rather than intraday price reactions to fundamental information.

Notable quotations from the academic research paper:

"In this study, I advance the understanding of drivers of short-term return reversals by a careful examination of when temporal price mispricing or concessions, resulting in short-term reversals, accrue. In particular, I decompose short-term return reversals into reversal of overnight return and that of intraday returns.

Though I am the first to decompose short-term return reversals in this way, such a decomposition is natural, because these two periods differ along several key dimensions. Fama (1965) shows that volatility is higher during trading hours (intraday) than it is during non-trading hours (overnight), and Kelly and Clark (2011) suggest that overnight stock returns are, on average, higher than intraday returns. Thus, decomposing return reversals into overnight and intraday return components could yield new and important information on the drivers of the short-term return reversal.

I find that short-term return reversal is mainly attributed to reversal of lagged intraday returns. In other words, intraday returns significantly reversed in the following week, while overnight returns do not. These results hold strongly in each international sample (i.e., US stocks, Japanese stocks, UK stocks, and Eurozone stocks). Even after excluding one-day returns in order to avoid the bid-ask bias, the strong intraday return reversal remains. Furthermore, this finding is robust to a variety of controls and risk-adjustments.

The two competing explanations for short-term reversals raise the question of whether the reversal of intraday returns results from a reaction to new information which occurs intraday, or from a price concession to absorb intraday transactions.

I attempt to address this question in two steps. I first examine whether the negative association between intraday returns and subsequent returns is stronger arounf fundamental news. If a reversal of intraday returns is attributed to a price reaction to fundamental news which occurs intraday, the negative association should be strengthened by the existence of fundamental news.

Then I analyze whether a reversal of intraday returns is stronger when liquidity providers request higher compensation. To this end, I examine whether the reveral of intraday returns is associated with a volatility index.

The analysis reveals that reversals of intraday returns are not stronger around news, indicating that the overreaction explanation is not plausible for the short-term reversals. On the other hand, reversals of intraday returns are stronger for illiquid stocks and when the volatility index is higher. These results support the view that reversals of intraday returns are attributed to price concessions that enable liquidity providers to absorb intraday transactions. The finding supports the lliquidity explanation."


Are you looking for more strategies to read about? Check http://quantpedia.com/Screener

Do you want to see performance of trading systems we described? Check http://quantpedia.com/Chart/Performance

Do you want to know more about us? Check http://quantpedia.com/Home/About


Follow us on:

Facebook: https://www.facebook.com/quantpedia/

Twitter: https://twitter.com/quantpedia

Share onRefer to a friend

Subscribe for Newsletter

Be first to know, when we publish new content


    logo
    The Encyclopedia of Quantitative Trading Strategies

    Log in

    MORE INFO
    We boasts a total prize pool of $15,000
    Gain a Share of a Total Prize Pool of $15.000
    MORE INFO
    $15.000
    Gain a Share of a Total Prize Pool
    SUBSCRIBE TO NEWSLETTER AND GET:
    - bi-weekly research insights -
    - tips on new trading strategies -
    - notifications about offers & promos -
    Subscribe