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Wiley InterScience | ||||||
  European Financial ManagementVolume 11 Issue 3, Pages 313 - 338 Published Online: 7 Jun 2005 © 2010 Blackwell Publishing Ltd Published in conjunction with the European Financial Management Association
Abstract | References | Full Text: PDF (Size: 171K) | Related Articles | Citation Tracking  European Momentum Strategies, Information Diffusion, and Investor Conservatism This research was conducted when John A. Doukas was a visiting professor at the Stern School of Business, New York University. We are grateful for the financial support provided by INQUIRE, EUROPE and The Leverhulme Trust. The authors also gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data, available through the Institutional Brokers Estimate System I/B/E/S. This data has been provided as part of a broad academic program to encourage earnings expectations research. We would like to thank M. Kejriwal for excellent assistance. Copyright Blackwell Publishers Ltd, 2005 KEYWORDS
short‐term momentum returns
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gradual dissemination of information
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investor psychological conservatism
KEYWORDS
G1 •
G11 •
G14 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 in forming earnings expectations by not updating them adequately relative to their prior beliefs and by undervaluing the statistical weight of new information. Received: 28 February 2002; Accepted: 09 September 2002; | 
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