Short-Term Reversal Effect in Stocks
Long last week’s (or last month’s) losers and short the winners — a short-horizon reversal that decays into intermediate momentum.
Definition
Classic: rank on prior-week or prior-month return, long the losers, short the winners, hold a week. Liquidity and microstructure (bid-ask bounce) eat a lot of the print. Skip the most illiquid names or you are harvesting bounce, not alpha.
Why it matters
It sits next to 12-1 momentum: different horizon, opposite sign. Combining them is a term-structure of returns, not a contradiction.
Case
A Monday open that fades Friday’s retail winners. After costs in small caps, the Sharpe is a TCA problem.
How to read it
Horizon, liquidity filter, and short-side borrow. If it only works in the bottom NYSE decile in 1980s data, it is not a live book.
Key papers
Landmark references with real publisher or arXiv links — not token-overlap noise.
- Returns to Buying Winners and Selling LosersJegadeesh, Titman · 1993 · Journal of FinanceMomentum; short-term reversal is the other horizon.