European Momentum Strategies, Information Diffusion, and Investor Conservatism

Phillip Jon McKnight, J Doukas

    Research output: Contribution to journalArticlepeer-review

    60 Citations (Scopus)

    Abstract

    In this paper we conduct an out-of-sample test of two behavioural theories that have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and the investor conservatism bias model of Barberis et al. (1998) in a sample of 13 European stock markets during the period 1988 to 2001. These two models predict that momentum comes from the (i) gradual dissemination of firm-specific information and (ii) investors failure to update their beliefs sufficiently when they observe new public information. The findings of this study are consistent with the predictions of the behavioural models of Hong and Stein's (1999) and Barberis et al (1998). The evidence shows that momentum is the result of the gradual diffusion of private information and investors' psychological conservatism reflected on the systematic errors they make informing earnings expectations by not updating them adequately relative to their prior beliefs and by undervaluing the statistical weight of new information.

    Original languageEnglish
    Pages (from-to)313-338
    Number of pages26
    JournalEuropean Financial Management
    Volume11
    Issue number3
    DOIs
    Publication statusPublished - Jun 2005

    Keywords

    • short-term momentum returns
    • gradual dissemination of information
    • investor psychological conservatism
    • ANALYSTS FORECASTS
    • MARKET-EFFICIENCY
    • TRADING VOLUME
    • RETURNS
    • PROFITABILITY
    • EXPLANATIONS
    • PERFORMANCE
    • MODEL

    Fingerprint

    Dive into the research topics of 'European Momentum Strategies, Information Diffusion, and Investor Conservatism'. Together they form a unique fingerprint.

    Cite this