Working Paper: CEPR ID: DP15857
Authors: Maik Schmeling; Mamdouh Medhat
Abstract: We document a striking pattern in U.S. and international stock returns: Double sorting on last month's return and share turnover reveals significant short-term reversal among low-turnover stocks whereas high-turnover stocks exhibit short-term momentum. Short-term momentum is as profitable and as persistent as conventional price momentum. It also survives transaction costs and is strongest among the largest, most liquid, and most extensively covered stocks. Our results are difficult to reconcile with models imposing strict rationality but are suggestive of an explanation based on some traders underappreciating the information in prices.
Keywords: momentum; reversal; trading volume; bounded rationality
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low-turnover stocks (G14) | significant short-term reversal (G41) |
| high-turnover stocks (G14) | short-term momentum (E32) |
| underreaction to information in prices (G19) | persistent price movements (E32) |
| short-term momentum effect (G14) | persist for 12 months (C41) |
| skipping last few days of formation month (Y60) | stronger short-term momentum effect (G14) |