Industries and Stock Return Reversals

Abstract

This paper documents pervasive evidence of intra-industry reversals in monthlyreturns. Unlike the conventional reversal strategy based on stock returnsrelative to the market portfolio, we document intra-industry return reversalsthat are larger in magnitude, consistently present over time, and prevalentacross subgroups of stocks, including large and liquid stocks. These returnreversals are driven by order imbalances and noninformational shocks. Consistentwith reversals representing compensation for supplying liquidity, intra-industryreversals are stronger following aggregate market declines and volatile times,reflecting binding capital constraints and limited risk-bearing capacity ofliquidity providers.