Amplifying Short-term Reversal via Stocks with High Recent Returns

Are return reversals especially strong for lottery stocks? In their October 2023 paper entitled “Maxing Out Short-term Reversals in Weekly Stock Returns”, Chen Chen, Andrew Cohen, Qiqi Liang and Licheng Sun investigate return reversals for lottery stocks, those with high recent maximum daily returns (MAX). Specifically, for their main calculations, they each week:

• For each stock, calculate MAX during the week before last.
• Sort stocks into fifths (quintiles) based on MAX values.
• Within each MAX quintile, further sort stocks based on their last-week returns.

They then use these sorts to explore interactions between effects of past MAX and effects of past returns on next-week returns. Using weekly returns for U.S. common stocks during July 1963 to December 2022, they find that: (more…)