ravisupreme

Abstract:
This paper examines whether trading strategies based on short-term price reversals following large one-day losses have economically significant returns. We directly incorporate transactions costs by basing returns on the contemporaneous bid and ask quotes and jointly examine the effects of overreaction, liquidity pressure, and public information flow measures. Consistent with the overreaction hypothesis, trading strategy returns increase in the magnitude of event day loss. Consistent with behavioral models, the reversals are higher for event stocks without concurrent news releases. The evidence is generally supportive of the liquidity pressure hypothesis. The analysis suggests refined trading strategies yielding economically significant positive returns. The results are robust to a number of alternative tests