Daily Stock Returns: Momentum, Reversal, or Both

Much attention has been given to the momentum and reversal of individual security returns; however, relatively little research has focused on any comparable effect for overall markets. In a similar fashion, many existing studies examine short-term movements over, for example, weekly or monthly periods, yet comparatively little is known about extremely short periods (e.g., returns for a single day following a significant market move). We fill these gaps, finding that returns on days subsequent to extreme downward market-wide moves (below -1%) tend to exhibit return reversal; whereas, days following large upward moves (above 1%) generally continue with the momentum, although to a lesser degree. Thus, for the entire market over extremely short time periods, the evidence is less consistent than prior studies suggest and actually appears to indicate that market participants, contrary to popular opinion, respond favorably to extreme movements (positive or negative) in overall market returns.