Working Paper: NBER ID: w7159
Authors: Narasimhan Jegadeesh; Sheridan Titman
Abstract: This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-hiding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.
Keywords: momentum strategies; behavioral models; market efficiency
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| momentum profits due to behavioral biases (G41) | delayed overreactions to information (D80) |
| delayed overreactions to information (D80) | eventual reversals in stock prices (G17) |
| initial overreactions (Y20) | eventual corrections (Y20) |
| momentum profits (C69) | significant return reversals 4 to 5 years later (G14) |
| momentum profits (C69) | not explained by cross-sectional dispersion in expected returns (G19) |
| momentum profits (C69) | primarily due to behavioral biases (G41) |