Reversal and momentum patterns in weekly stock returns: European evidence

We analyze short-term reversal and medium-term momentum patterns in weekly stock returns in Europe. Focusing on raw and stock-specific returns, our empirical results show for both return specifications (a) a negative relation between weekly past returns and future returns in the short run and (b) a positive relation in the medium run. However, returns from 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 support the idea that short-term reversal in weekly stock returns is due to an over- or underreaction to firm-specific news nor that it is mainly driven by illiquidity. Medium-term momentum in weekly stock returns, on the other hand, can be connected to behavioral biases. Our concluding tests confirm that our findings are robust among industries, in subperiods, for the January effect and in varying market states. Finally, while medium-term momentum strategies remain profitable after accounting for transaction costs, short-term reversal strategies can be mainly explained by transaction costs due to their high turnover.