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Do Momentum and Reversals Coexist?

Last Updated on 10 February, 2024 by Rejaul Karim

The research paper “Do Momentum and Reversals Coexist?” by Jason Zhanshun Wei addresses the intriguing question of whether momentum and reversals can simultaneously exist in stock market behavior. Investigating stocks traded on the NYSE, AMEX, and NASDAQ from 1964 to 2009, the study finds a clear answer: yes.

While momentum predominates among small-cap stocks, both momentum and reversals coexist among large-cap stocks for up to six months. The paper identifies a momentum/reversal divide along the volatility dimension, with large-cap/low-volatility stocks demonstrating reversals and large-cap/high-volatility stocks displaying momentum.

Interestingly, this novel discovery cannot be fully explained by either risk-based or behavior-based theories. As a valuable contribution to the literature on stock market behavior, Wei’s paper offers unique insights into the coexistence of momentum and reversals and their implications for understanding market dynamics.

Abstract Of Paper

The answer to the title question is “Yes.” Examining stocks traded on the NYSE, AMEX and NASDAQ for the period of 1964 to 2009, this study discovers that, while momentum prevails among small stocks, momentum and reversals coexist among large stocks for a holding period of up to six months. The momentum/reversal divide is along the volatility dimension: Large-cap/low-volatility stocks exhibit reversals while large-cap/high-volatility stocks experience momentum. This new discovery cannot be fully rationalized with either risk-based or behavioral-based explanations.

Original paper – Download PDF

Here you can download the PDF and original paper of “Do Momentum and Reversals Coexist?

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Author

Jason Zhanshun Wei
University of Toronto – Rotman School of Management

Conclusion

In conclusion, the study “Do Momentum and Reversals Coexist?” by Jason Zhanshun Wei provides a definitive answer to the central question posed, confirming that momentum and reversals can indeed coexist in stock market behavior.

Analyzing data from stocks traded on the NYSE, AMEX, and NASDAQ between 1964 and 2009, the research uncovers that while small-cap stocks are primarily governed by momentum, both momentum and reversals are present among large-cap stocks for holding periods up to six months.

Furthermore, the paper highlights a momentum/reversal divide along the volatility dimension within large-cap stocks. This groundbreaking discovery, however, cannot be entirely rationalized by existing risk-based or behavior-based theories.

As a significant contribution to stock market behavior literature, this study opens up new avenues of inquiry for understanding the complexities of market dynamics and the coexistence of momentum and reversals in the financial arena.

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FAQ

Q1: What is the main focus of the research paper, and what is the key finding regarding the coexistence of momentum and reversals in stock market behavior?

The research paper investigates whether momentum and reversals can simultaneously exist in stock market behavior. The key finding is affirmative – both momentum and reversals coexist among large-cap stocks for a holding period of up to six months. The study identifies a divide along the volatility dimension, with large-cap/low-volatility stocks exhibiting reversals and large-cap/high-volatility stocks showing momentum.

Q2: How does the paper contribute to the existing understanding of stock market behavior, and what makes its findings significant?

The paper significantly contributes to the literature on stock market behavior by providing empirical evidence that challenges the traditional notion of a sequential occurrence of momentum and reversals. The coexistence of these phenomena in large-cap stocks opens up new avenues of inquiry. The findings are novel and not entirely explainable by existing risk-based or behavior-based theories, adding complexity to the understanding of market dynamics.

Q3: What is the significance of the momentum/reversal divide identified in the study, and how does it relate to the volatility dimension within large-cap stocks?

The momentum/reversal divide along the volatility dimension within large-cap stocks is a crucial aspect of the study. It reveals that large-cap/low-volatility stocks exhibit reversals, while large-cap/high-volatility stocks display momentum. This distinction adds nuance to our understanding of stock behavior and challenges previous assumptions about the uniformity of momentum and reversals across different stocks.

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