Research on the Reversal Effect of Growth Stocks

This study delves into the reversal effects in the U.S. stock market using American stock data listed on the New York Stock Exchange, American Stock Exchange, and NASDAQ from 1970 to 2022. The aim is to answer two key questions: What characteristics make certain groups of stocks exhibit stronger reversal effects? And what market conditions contribute to stronger reversal effects?To begin with, the paper examines whether growth stocks exhibit stronger reversal effects compared to value stocks from the perspective of growth stocks. The study uses the price-to-earnings ratio (P/E ratio) to measure stock growth, with high P/E ratio stocks classified as growth stocks and low P/E ratio stocks classified as value stocks. The findings reveal: 1) The reversal effects of growth stocks are significantly stronger than those of value stocks; 2) After a substantial market decline in the previous year, the reversal effects of stocks are significantly stronger; 3) Across different market environments, the reversal effects of growth stocks are consistently stronger than those of value stocks, and growth stocks exhibit the most pronounced reversal effects in markets following significant declines. Furthermore, the paper explains why the reversal effects of growth stocks are stronger from three perspectives: market risk exposure, interest rate sensitivity, and profit volatility. The study discovers that the market BETA, duration, interest rate sensitivity, earnings per share volatility, and positive correlation with the Purchasing Managers' Index (PMI) for growth stocks are all significantly higher than those for value stocks. This helps explain why, during stock market rallies/interest rate declines/economic expansions, the rebound strength of growth stocks' prices/profits is higher than that of value stocks, leading to stronger reversal effects. Finally, the study finds that the phenomenon of "stronger reversal effects in growth stocks" also holds true in the A-share market, which serves as an emerging market.