Momentum and behavioral finance

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

Purpose – The purpose of this paper is to re-examine the sources of momentum profits by focusing on momentum in monthly returns. Design/methodology/approach – The paper utilizes a decomposition method proposed by Du and Watkins. Findings – Different from previous studies, it is found that momentum may have multiple sources, and that risk or behavioral biases in isolation may not be sufficient to explain momentum. Practical implications – The paper's finding that momentum may be at least partly due to risk is important for investors to understand the risk of momentum investing. Originality/value – This paper focuses on the sources of momentum profits in monthly returns. The findings that momentum has multiple sources call for new explanations for momentum because all existing theories of momentum are either rational or behavioral. Furthermore, the finding that lead-lag relationship plays an important role in momentum suggests that researchers should focus on mis-reaction to common (market-wide) information to explain momentum as emphasized by Lo and MacKinlay.

Original languageEnglish (US)
Pages (from-to)364-379
Number of pages16
JournalManagerial Finance
Volume38
Issue number4
DOIs
StatePublished - Mar 9 2012

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Keywords

  • Behavioral finance
  • Financial risk
  • Momentum
  • Profit
  • Returns

ASJC Scopus subject areas

  • Finance
  • Strategy and Management

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