Analysts’ underreaction and momentum strategies

Vitor Azevedo

Journal of Economic Dynamics and Control, 2023, vol. 146, issue C

Abstract: I estimate a theory-based behavioral momentum using analysts’ predictable (errors driven by) underreaction (APU) as a proxy for newswatchers underreaction. The results show that APU strongly predicts analysts’ errors and, more importantly, stock returns. A long-short strategy based on APU generates a value-weighted Fama-French six-factor alpha of 0.85% per month (t-stat = 3.48). Furthermore, I propose an underreaction factor that subsumes the momentum factor in spanning tests and provide higher explanatory power for a wide range of return predictors. The results support behavioral explanations of the momentum effect and show that APU can better capture newswatchers’ underreaction than traditional estimates.

Keywords: Analysts’ predictable error; Analysts’ forecasts; Momentum; Post-earnings announcement drift; Stock market anomaly (search for similar items in EconPapers)
JEL-codes: G12 G29 M41 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002639

DOI: 10.1016/j.jedc.2022.104560

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