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THE MONETARY ENVIRONMENT AND LONG‐RUN REVERSALS IN STOCK RETURNS
Author(s) -
GarciaFeijoo Luis,
Jensen Gerald R.
Publication year - 2014
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12026
Subject(s) - expansive , economics , stock (firearms) , monetary economics , monetary policy , short run , mechanical engineering , materials science , compressive strength , engineering , composite material
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.