Reviving Short-term Reversal?

Are there ways to revive the fading performance of the short-term reversal (STR) strategy, which is long stocks with the lowest returns last month and short stocks with the highest? In their September 2023 paper entitled “Reversing the Trend of Short-Term Reversal”, David Blitz, Bart van der Grient and Iman Honarvar investigate revival of the strategy by suppressing its conflicts with either industry momentum or general momentum. Specifically, at the end of each month, they sort stocks into fifths (quintiles) in three ways:

1. Generic STR – sorting on simple last-month returns.
2. Industry-adjusted STR – sorting on last-month returns minus respective last-month industry returns.
3. Residual STR – sorting on 3-factor alphas (adjusting for market, size and book-to-market factors over rolling 36-month intervals), scaled for volatility over the past 36 months.

For each approach each month, they form a hedge portfolio that is long (short) the quintile with the lowest (highest) past performances. For all three approaches, they impose regional neutrality by sorting stocks separately within North America, Europe and the Pacific region. They also consider developed and emerging markets segmentation. Using end-of-month data for all stocks in the MSCI World index during December 1985 through December 2022 (an average of 1,745 stocks per year), they find that: (more…)