Aurora Borealis
19 January 2024 Financial Analysts Journal Volume 80, Issue 2

Reversals and the Returns to Liquidity Provision

  1. Wei Dai
  2. Mamdouh Medhat
  3. Robert Novy-Marx
  4. Savina Risova
The authors show that short-run reversals vary with different aspects of stock-level liquidity. In particular, higher volatility yields stronger, initially faster reversals while lower turnover yields more persistent, eventually stronger reversals.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content

Abstract

Different aspects of liquidity impact the performance of short-run reversals in different ways, consistent with the predictions of microstructure models. Higher volatility is associated with faster, initially stronger reversals, while lower turnover is associated with more persistent, ultimately stronger reversals. These facts also hold outside the US and explain several seemingly disparate results in the literature.

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