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Heterogenous beliefs and momentum profits

By Michela Verardo

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

Topics: HG Finance
Publisher: Foster School of Business, University of Washington
Year: 2009
DOI identifier: 10.1017/S0022109009990214
OAI identifier: oai:eprints.lse.ac.uk:16593
Provided by: LSE Research Online
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