The authors acknowledge helpful comments received from an associate editor, an anonymous referee, and Werner DeBondt, Richard DeFusco, Sanjay Deshmukh, Art Durnev, Keith Gamble, Jon Garfinkel, John Geppert, Wei Li, Jeff Madura, Amrita Nain, Manferd Peterson, Yiming Qian, Ashish Tiwari, Emre Unlu, Anand Vijh, Tong Yao, and Tom Zorn. In addition, the paper benefited from comments received from seminar participants at the University of Iowa, DePaul University, the University of Nebraska–Lincoln, Northern Illinois University, and at the meetings of the 2012 Financial Management Association (Atlanta, GA). All errors and omissions are our own.
THE MONETARY ENVIRONMENT AND LONG-RUN REVERSALS IN STOCK RETURNS
Article first published online: 13 MAR 2014
© 2014 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 37, Issue 1, pages 3–26, Spring 2014
How to Cite
Garcia-Feijoo, L. and Jensen, G. R. (2014), THE MONETARY ENVIRONMENT AND LONG-RUN REVERSALS IN STOCK RETURNS. Journal of Financial Research, 37: 3–26. doi: 10.1111/jfir.12026
- Issue published online: 13 MAR 2014
- Article first published online: 13 MAR 2014
Previous research attributes long-run reversals to investor overreaction or tax-motivated trading; we offer an alternative explanation based on the monetary environment. Prices rebound for stocks that have performed poorly over the past several years (losers); however, the rebound occurs only during expansive monetary conditions. Winners only reverse course when monetary conditions are restrictive. Past research shows that the three-factor model explains long-run stock reversals; we show that the monetary environment plays an instrumental role in the observation. Finally, we show that reversal patterns are closely linked to both the monetary environment and a firm's level of financial constraints.