Practical Applications of Reversing the Trend of Short-Term Reversal

In <ext-link><bold><italic>Reversing the Trend of Short-Term Reversal</italic></bold></ext-link>, from the April 2024 issue of <bold><italic>The Journal of Portfolio Management</italic></bold>, authors <bold>David Blitz</bold>, <bold>Bart van der Grient</bold>, and <bold>Iman Honarvar</bold> of <bold>Robeco</bold> find that although the short-term reversal (STR) premium has mostly disappeared in recent years, it can be revived with certain enhancements. An “industry-relative” strategy counters generic STR’s tendency to go against short-term industry momentum, while a “residual” strategy adjusts stock returns for their exposures to common factors and scales them by volatility. Using data from December 1985 to December 2022, the authors found that both the industry-relative and residual enhancements outperformed the generic strategy in terms of risk-adjusted performance. They noted that while any stand-alone STR strategy involves high trading costs and may not be profitable, benefits may be achieved by combining STR with other short-term factors.