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In constructing the reversal variable, we tend to ignore the strong momentum in individual stock returns. A simple subtract the average of past 12-month return from previous month return allows… Click to show full abstract
In constructing the reversal variable, we tend to ignore the strong momentum in individual stock returns. A simple subtract the average of past 12-month return from previous month return allows us to alleviate the momentum return. Consequently, the reversals are significantly stronger. We also find that states of market have significant impact on reversal profit indirectly through momentum effect. In down market, when momentum effect appears weak, the profit of reversal strategy is significantly higher than in up market, when momentum effect is strong.
Journal Title: Finance Research Letters
Year Published: 2020
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