Interaction of Short-term Reversal and Liquidity

Are there different patterns of short-term stock return reversal based on stock liquidity (measured by size, volatility or turnover)? In their January 2023 paper entitled “Reversals and the Returns to Liquidity Provision”, Wei Dai, Mamdouh Medhat, Robert Novy-Marx and Savina Rizova examine interactions between short-term reversal returns and stock liquidity metrics. They select reversal candidates from the fifth (quintile) of stocks with the highest (winners) and lowest (losers) industry-relative returns over the last 1, 5 or 21 trading days, excluding 3-day returns around earnings announcements. They separately sort stocks into quintiles by size (market capitalization), volatility (standard deviation of daily returns over the last 63 days) or turnover (average percentage of shares outstanding traded daily over the last 63 days). While the sample includes all NYSE, AMEX and NASDAQ common stocks, quintile breakpoints come from NYSE stocks only. Finally, they look at returns to value-weighted intersections of reversal candidate quintiles and size, volatility or turnover quintiles. Using the specified inputs for all listed U.S. common stocks, measured monthly, during January 1973 through December 2021, they find that:

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