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Academic audit

Failedequity XS reversal

Short Term Reversal In Stocks

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation
Gate 1
Survivorship-free
free
clean panel
Gate 2
Placebo ≥ P95
not run
Eliminated here
Gate 3
Cost-aware net
RF -0.70
net-negative after costs
Failed
Worst 12-month leg (RF)-0.91
−1.00 floor0
Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.
Rejected at the cost gate — the net edge turns negative once modelled costs are applied.

Short-term reversal is the tendency for stocks that underperformed over the past month to outperform in the next, and vice versa. The classic long/short version buys recent losers and sells recent winners, rebalancing every month.

What we found

The reversal effect is real at the gross level, but it does not survive trading costs. Because the long/short book rebalances monthly, turnover is high, and the modelled costs of that turnover turn the result net negative over our sample. Risk-adjusted, the strategy came out at RF -0.7 with a worst-year RF of -0.91. This is a failed test: the underlying anomaly exists in the raw signal, but the implementation cost required to harvest it removes it.

How we tested it
2005–2026 test windowmodelled liquidity-aware costssurvivorship free
  • Data: survivorship-free 1077-name US common-stock panel, 2005-2026. Realistic modelled costs.
  • Placebo / robustness test: real result vs random baskets or shuffled signals (real vs the 95th percentile of random)
Source: Jegadeesh (1990) / Lehmann (1990), short-term (1-month) reversal
Read the paper ↗
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Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.