Long-Run Reversal

Definition

Long-run reversal measures market-adjusted performance over a long formation window and tilts toward the most extreme prior losers while shorting the strongest prior winners. In the representative setup, the formation period spans three years and ends before the rebalance date to avoid simple short-horizon overlap.

The economic intuition is overreaction: investors may push prices too far away from longer-run fundamentals after dramatic long-horizon winners and losers emerge. The signal is deliberately contrarian and asks whether the most heavily punished names eventually rebound.

Inside the finance research stack, the representative implementation sorts the Russell 1000 cross-section on the long-horizon reversal measure and compares the deepest prior losers against the strongest prior winners in a market-neutral spread.

Headline Summary

The first pass on this signal starts with a headline comparison across the sorted signal portfolios and the Russell 1000 benchmark.

Top Quintile contains the lowest-ranked names in the representative sort, while Bottom Quintile contains the highest-ranked names.

The baseline return path shows how the top-ranked bucket, bottom-ranked bucket, and long-short spread evolved through time in the representative Russell 1000 formation.

Start-Date Sensitivity

This section checks whether the signal depends too heavily on when the strategy begins. We restart the same baseline long-short construction every six months and compare how the excess return profile changes across those staggered entry dates.

Each row uses the same monthly market-weighted portfolio construction as the baseline sort, but starts the sample at the stated month and carries it through the final available month. Excess returns are measured relative to the 3-month U.S. Treasury bill rate, proxied by the FRED 'DTB3' series.

Sector Results

Sector results show whether the signal's long-short behavior is broad across the Russell 1000 or concentrated in a smaller set of industries.

The plot shows average monthly excess returns for sector-specific long-short implementations using the same baseline portfolio construction within each sector.

Path-Dependency Distribution

This section tests how sensitive the turnover-constrained implementation is to the path of portfolio formation. We run 1,000 different paths that each try to maximize the signal while allowing 10% turnover at each monthly rebalance.

The realized path starts from the actual T-B portfolio on the first initialization date. The other paths use random initializations on day one, then follow the same monthly turnover budget through time. The plot shows the distribution of average monthly excess returns across those random-start paths, with the realized path marked separately for comparison.