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Heterogenous beliefs and momentum profits

Verardo, Michela (2009) Heterogenous beliefs and momentum profits. Journal of Financial and Quantitative Analysis, 44 (4). pp. 795-822. ISSN 0022-1090

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Abstract

Recent theoretical models derive return continuation in a setting where investors have heterogeneous beliefs or receive heterogeneous information. This paper tests the link between heterogeneity of beliefs and return continuation in the cross-section of U.S. stock returns. Heterogeneity of beliefs about a firm's fundamentals is measured by the dispersion in analyst forecasts of earnings. The results show that momentum profits are significantly larger for portfolios characterized by higher heterogeneity of beliefs. Predictive cross-sectional regressions show that heterogeneity of beliefs has a positive effect on return continuation after controlling for a stock's visibility, the speed of information diffusion, uncertainty about fundamentals, information precision, and volatility. The results in this paper are robust to the potential presence of short-sale constraints and are not explained by arbitrage risk.

Item Type: Article
Official URL: http://depts.washington.edu/jfqa/
Additional Information: © 2009 Foster School of Business, University of Washington
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: UT ISI:000270604300003
Date Deposited: 28 Nov 2009 14:55
URL: http://eprints.lse.ac.uk/16593/

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