Identifying inconsistency in short-term reversal: evidence from the Chinese stock market

ABSTRACT

We study the inconsistency between past return and profitability growth to explore the mispricing explanation for short-term reversal. Our empirical results indicate that reversal profits are more concentrated in stocks where past returns are inconsistent with profitability growth. Based on our finding, we develop a growth-anchored reversal (GAR) strategy defined as buying past losers with high profitability growth and selling past winners with low growth. This refined short-term reversal strategy turns out to be more profitable than conventional reversal strategy in the Chinese stock market. Our results remain robust under different sample periods, different market situations and alternative profitability measures.

KEYWORDS:

• Short-term reversal
• profitability growth
• mispricing
• stock market anomaly

JEL CLASSIFICATION:

• G11
• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.