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Heterogeneous Beliefs and Momentum Profits

Published online by Cambridge University Press:  01 August 2009

Michela Verardo
Michela Verardo*
Affiliation:
London School of Economics, Houghton Street, London, WC2A 2AE, UK. [email protected]
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 4 , August 2009 , pp. 795 - 822
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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