N°26-66: Asymmetric Reversals

Short-term return reversal is one of the most robust asset-pricing anomalies, and is commonly linked to liquidity provision. We decompose individual firm stock returns into two distinct components: SYS, the component of returns that can be linked to systematic risk and public information releases; and an orthogonal residual RES. The RES component reverses, while the SYS component exhibits continuation. Moreover, the residual reversals are highly asymmetric: positive residual shocks reverse much more slowly than negative shocks. A return factor based on asymmetric idiosyncratic reversal subsumes the idiosyncratic volatility factor and a broad set of other short-horizon anomalies. Our findings suggest that asymmetric idiosyncratic reversal (AIR) is the primary driver of short-term return predictability.