Abstract
This paper documents pervasive evidence of intra-industry reversals in monthly returns. Unlike the conventional reversal strategy based on stock returns relative to the market portfolio, we document intra-industry return reversals that are larger in magnitude, consistently present over time, and prevalent across sub-group of stocks, including large and liquid stocks. These return reversals are driven by order imbalances and non-informational shocks. Consistent with reversals representing compensation for supplying liquidity, intra-industry reversals are stronger following aggregate market declines and volatile times, reflecting binding capital constraints and limited risk bearing capacity of liquidity providers.
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