The effect of short-term return reversals on momentum profits

The authors investigate the effect of a short-term stock return reversal on the term structure of momentum profits in the Korean stock market following Goyal and Wahal (2015). Their empirical findings show that the term structure of momentum is more pronounced when a return reversal lasts up to two months but is substantially weakened when past performance over the last two months is not taken into account for portfolio formation. Their evidence suggests that the term structure of momentum profitability arises primarily from a carryover of the return reversal from the previous two months.

Dynamic Liquidity Management by Corporate Bond Mutual Funds

How do corporate bond mutual funds manage liquidity to meet investor redemptions? We show that during tranquil market conditions, these funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes. When aggregate uncertainty rises, however, they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity. This fund-level dynamic management of liquidity appears to affect the broad financial market: Redemptions from the corporate bond fund sector lead to more corporate bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals.

Intraday Return Reversals: Empirical Evidence from the Korean ETF Market

We find that the overnight returns of Korean exchange-traded index funds (ETFs) are significantly positive, whereas the subsequent intraday returns are negative. These intraday return reversals are caused by relatively higher opening prices than the closing prices. In the Korean ETF market, where institutional investors are dominant participants, the return reversals are not explained by the attention hypothesis as in Berkman et al. [1]. Hence, we investigate whether the disagreement hypothesis can explain return reversals. Under the disagreement situations between positive and negative traders at the open, positive traders can have a positive influence on the ETF prices by increasing their investments. However, negative traders, who give up investments due to limited short selling opportunities in the ETF market, have no effects on the prices. Comparing ETF markets with KOSPI 200 Futures where there are no restrictions on short selling, we find that short selling constraints are significant factors for the return reversals. This implies that disagreement among the investors can cause return reversals even in the markets without noise traders. Using unique Korean market data, we conclude that return reversals cannot be completely explained by the attention hypothesis, and that disagreement among investors is also a significant factor for the return reversals. This study contributes to the existing literature by showing that the attention hypothesis does not explain return reversals in the ETF market completely, and suggesting the disagreement hypothesis as an alternative.

Short-Term Return Reversals and Intraday Transactions

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.