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[Shiller]
"In addition to this long-run tendency toward reversal
of trends, there ia a shorter-run weak tendency toward momentum,
for stock prices to continue moving in the same direction". |
[Shleifer]
"Subsequent to De Bondt and Thaler's findings, researchers
have identified more ways to successfully predict security returns,
particularly those of stocks, based on past returns. Among these
findings, perhaps the most important is that of momentum, which
shows that movements in individual stock prices over the
period of six to twelve months tend to predict future movements
in the same direction. That is, unlike the long-term trends
identified by De Bondt and Thaler, which tend to reverse themselves,
relatively short-term trends continue. |
The
52-week High and Momentum Investing, George and Hwang, 2004
 There
is substantial evidence that stock prices do not follow random walks
and that returns are predictable. Barberis, Shleifer and Vishny
(1998), Daniel, Hirshleifer, and Subrahmanyam (1998), and Hong and
Stein (1999) present theoretical models that attempt to explain
the coexistence of intermediate horizon momentum and long horizon
reversals in individual stock returns as the result of
systematic violations of rational behavior by traders. In Barberis,
Shleifer, and Vishny and in Hong and Stein, momentum occurs because
traders are slow to revise their priors when new information arrives.
Long-term reversals occur because when traders finally do adjust,
they overreact. In Daniel, Hirshleifer, and Subrahmanyam, momentum
occurs because traders overreact to prior information when new information
confirms it. Long-term reversals occur as the overreaction is corrected
in the long run. In all three models, short-term momentum and long-term
reversals are sequential components of the process by which
the market absorbs news. In this paper, we find that a
readily available piece of information - the 52-week high price
- largely explains the profits from momentum investing. We examine
the 52-week high because the models predict, in particular, that
traders are slow to react, or overreact, to good news. A stock whose
price is at or near its 52-week high is a stock for which good news
has recently arrived. This may be the time when biases in how traders
react to news, and hence profits to momentum investing, are at their
peaks. We find that nearness to the 52-week high is a better predictor
of future returns than are past returns, and that nearness to the
52-week high has predictive power whether or not stocks have experienced
extreme past returns. This suggests that price levels are more important
determinants of momentum effects than are past price changes. These
findings present a serious challenge to the view that markets are
semi-strong-form efficient. An explanation of behavior that is consistent
with our results is that traders use the 52-week high as a reference
point against which they evaluate the potential impact of news.
This description is consistent with results in experimental economics
research on the "adjustment and anchoring bias" surveyed
in Kahneman, Slovic, and Tversky. Our results suggest that traders
might use the 52-week high as an "anchor".
We also examine whether long-term reversals occur when past performance
is measured based on nearness to the 52-week high. They do not.
This finding, coupled with those described above, suggests that
short-term momentum and long-term reversals are not likely to be
components of the same phenomenon. Our findings suggest that models
in which agents' valuations depend on nearness of the share
price to an anchor will be successful in explaining price
dynamics. |
Momentum
Strategies, Chan, Jegadeesh and Lakonishok, 1996
"We relate the predictability of future returns from past returns
to the market's underreaction to information, focusing on past earnings
news. Past return and past earnings surprise each predict large
drifts in future returns after controlling for the other. There
is little evidence of subsequent reversals in the returns of stocks
with high price and earnings momentum. Market risk, size and book-to-
market effects do not explain the drifts. Security analysts' earnings
forecasts also respond sluggishly to past news, especially in the
case of stocks with the worst past performance. The results suggest
a market that responds only gradually to new information". |
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Momentum
and overreaction in experimental asset markets, Vaginal, Porter
and Smith, 2000
"Price volatility and investor overreactions are commonplace
in experimental asset markets. Understanding the price dynamics
in these markets is crucial for designing successful new trading
institutions. We report on a series of experiments to test the predictions
of a new momentum model using a dynamical systems approach". |
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Dispersion
in Analyst Forecasts and the Profitability of Earnings Momentum
Strategies, Disc he , 2001
"It is a well documented phenomenon that stock prices underreact
to news about future earnings and drift in the direction suggested
by revisions in analysts' earnings forecasts. This paper shows that
the dispersion in analysts' consensus forecasts contains incremental
information to predict future stock returns. Higher abnormal returns
can be achieved by applying an earnings momentum strategy to stocks
with a low dispersion. This finding supports one of the recent behavioral
models in which investors focus too little on the weight of new
evidence and conservatively update their beliefs in the right direction,
but by too little in magnitude with respect to more objective information".
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Bad
News Travels Slowly: Size, Analyst Coverage, and the Profitability
of Momentum Strategies, Hong, Lim and Stein, 1999
"First, once one moves past the very smallest stocks, the profitability
of momentum strategies declines sharply with firm size. Second,
holding size fixed, momentum strategies work better among stocks
with low analyst coverage. Finally, the effect of analyst coverage
is greater for stocks that are past losers than for past winners".
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