Short-Term Stock Price Reversals May Be Reversed

In present study, I explore intraday behavior of stock prices. In particular, I try to shed light onthe dynamics of stock price reversals and namely, on the short-term character the latter maypossess. For each of the stocks currently making up the Dow Jones Industrial Index, I calculateintraday upside and downside volatility measures, following Becker et al. (2008) and Klossner etal. (2012), as a proxy for reversed overreactions to good and bad news, respectively. I documentthat for all the stocks in the sample, mean daily returns following the days when a stock’supside volatility measure was higher or equal to its downside volatility measure are higher thanfollowing the days when the opposite relationship held, indicating that stock prices display ashort-run ‘reversals of reversals’ behavior following corrected, or reversed, overreactions tonews. Furthermore, I construct seven different portfolios built upon the idea of daily adjustinga long position in the stocks that according to ‘reversals of reversals’ behavior are expectedto yield high daily returns, and a short position in the stocks, whose daily returns are expectedto be low. All the portfolios yield significantly positive returns, providing an evidence for thepractical applicability of the ‘reversals of reversals’ pattern in stock prices.