Reversal and Momentum Patterns in Weekly Stock Returns: European Evidence

Abstract

We analyze short-term reversal and medium-term momentum patterns in weekly stock returns in Europe. Focusing on raw and on stock-specific returns, our empirical results show for both return specifications i) a negative relation between weekly past returns and future returns in the short run and ii) a positive relation in the medium run. However, returns of reversal and momentum strategies based on stock-specific returns are less volatile. In further analyses, we find short-term reversal and medium-term momentum patterns to be connected to stock characteristics. Looking at the potential causes of these effects, our results do not corroborate that short-term reversal in weekly stock returns is due to an over- or underreaction to firm-specific news nor mainly driven by illiquidity. On the other hand, medium-term momentum in weekly stock returns can be connected to behavioral biases. Finally, our concluding tests confirm that our findings are robust among industries, in sub-periods, for the January effect and in varying market states.