Fads, Martingales, and Market Efficiency
Read the paperopens doi.org in a new tab
What they found
Lehmann tested whether stock returns reverse from one week to the next. Using weekly returns on U.S. stocks from 1962 to 1986, he found that a portfolio that bought the previous week's losers and sold the previous week's winners earned positive returns in about 90% of weeks. He argued this looked like short-lived 'fads' or liquidity-driven price pressure that reverses quickly, rather than changes in fundamentals, though he acknowledged that bid-ask bounce and costs would eat much of the paper profit.
What you can use
- Week-to-week reversals in individual stocks are extremely consistent on paper.
- The consistency comes largely from liquidity provision: you are being paid to take the other side of temporary price pressure.
- These are exactly the returns that market makers and HFTs now capture, so they are largely inaccessible to retail traders.
Caveats
Pre-1987 weekly data; bid-ask bounce inflates measured reversals. Later studies show much of the profit vanishes after transaction costs and disappears in large, liquid stocks.
Tags: mean-reversion, short-term-reversal, liquidity, weekly
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.