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The reference dependency of short-term reversal

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  • Goh, Jihoon
  • Jeong, Giho
  • Kang, Jangkoo

Abstract

The short-term reversal anomaly has been believed to be compensation for liquidity provision. We put forth the hypotheses that i) liquidity provision for a stock increases with the stock's capital gains overhang and ii) short-term reversal is more pronounced for the stocks with a large capital loss overhang. Our empirical findings support our hypotheses and the results hold firmly, even after we control for risk as well as lottery preferences and past return effects. We also document that this reference dependency of short-term reversal is stronger among stocks with low institutional ownership and during the low liquidity period.

Suggested Citation

  • Goh, Jihoon & Jeong, Giho & Kang, Jangkoo, 2022. "The reference dependency of short-term reversal," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 195-211.
    • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:195-211
    DOI: 10.1016/j.iref.2021.11.008
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    More about this item

    Keywords

    Short-term reversal; Capital gains overhang; Reference dependency;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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