Short-Term Reversal in Government Bonds: Evidence of State-Dependent Risk from an Emerging Market

This study investigates whether short-term reversal exists in an emerging government bond market and whether its returns are consistent with a risk-based explanation. Using Indonesian government bonds from January 2010 to December 2025, the results show that loser portfolios outperform winner portfolios in terms of excess returns relative to the benchmark. A long–short reversal strategy produces statistically significant excess returns and remains highly persistent across rolling 10-year windows, although the evidence is weaker over shorter 5-year horizons. Further analysis indicates that the strategy experiences statistically significant losses during bad times while delivering positive average returns over the full sample, broadly aligned with a risk-based interpretation of short-term reversal. Transaction cost analysis further supports the strategy’s practical feasibility, as observed bid–ask spreads for on-the-run Indonesian government bonds remain below the estimated breakeven threshold. Overall, this study provides rare evidence on short-term reversals, their state-dependent performance, and their practical feasibility in an emerging government bond market.