Wednesday, April 11, 2007
So Long Reversion
In an April 10th research report, Daiwa's numerical gurus Yoshino and Sagawa wrote the epithet for naive price reversion strategies in the Japanese equity market. That price reversion has been the mainstay of many a naive arbitrageur in Japan from the bubble to the depths and back is noteworthy, though official pronouncements a brokerage firm of anything that reduces customers' trading turnover is rare to say the least. But Mssr's Yoshino and Sagawa have - up until now - been doing nice work, so their research, if nothing else, should be weighed carefully.
Their preamble summarizing the literature and history is coherent enough. And their gross numbers, while pathetically inadequate DO mirror the general condition of naive reversion, highlighting in particular the dearth of return since 2002. And while they arrive at a possible replacement in the form of a simple sector reversion model, it's paltry return is in all likelihood not robust to transactions costs and security borrowing limitations.
But in my mind, they fail to address the most nagging question of all: Why should reversion have persisted in Japan, contravening the normative behaviour of return persistence patterns highlighted by Jegadeesh in the US, and replicated by others for virtually all other global equity markets? For in even weakly efficient markets, BOTH naive reversion AND naive momentum shouldn't exist. Nonetheless, it [reversion] did, and rather than mourn and eulogize its passing, researchers with any sense of curiousity should set to work on why it was, historically speaking, so omnipresent.