When Is Reversal Strong? Evidence From Developed Markets

This study analyzed the reversal strategy for the five most capitalized developed markets using portfolio analysis and the Fama–Macbeth (FM) regression method. The results of the portfolio analysis showed that the unconditional reversal strategy is persistent only for Germany and Japan. After testing the strategy on firms with higher expected costs of liquidity provision, however, the reversal returns become stronger across all markets. Nevertheless, the strongest support for the reversal strategy was found using the FM methodology while controlling for notable firm-related characteristics. Importantly, the reversal returns were strongly related to market volatility, which proxies for periods when the cost of provision of market liquidity is higher.