Abstract

We estimate a short term reversal process for daily US equity returns. Over our primary sample period of 1972-2014, and for our sample of the 100 largest traded firms, on average approximately 90% of idiosyncratic price shocks are permanent. The remaining 10% is temporary, and decays exponentially toward zero, with a half life of about 2.5 days. While the rate of decay (the half life) is relatively constant over time, the magnitude decay varies considerably over the sample. Our findings are consistent with the slow movement of capital (Duffie 2010). Also, in contrast with previous literature, we find no evidence that this rate of mean reversion is related to market-wide measures of illiquidity, such as the VIX. Our results are thus also consistent with a lack of integration across capital markets.

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Citation

Collin-Dufresne, Pierre, and Kent Daniel. "Liquidity and Return Reversals." Columbia Business School, December 10, 2014.

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