SHORT-HORIZON RETURN REVERSALS AND THE BID-ASK SPREAD

We show that the pattern of short-term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. We develop additional testable implications of these models and document supporting evidence. Our findings indicate that to a large extent the short-horizon return reversals can be explained by dealer-inventory-related market microstructure effects. Journal of Economic Literature Classification Numbers: G14, G20. (C) 1995 Academic Press, Inc.