Momentum and Reversals When Overconfident Investors Underestimate Their Competition

The financial crisis of 2007–2009: Causes and remedies

Jiang Luo, Avanidhar Subrahmanyam and Sheridan Titman

The Review of Financial Studies, 2021, vol. 34, issue 1, 351-393

Abstract: We develop a model in which overconfident investors overestimate their own signal quality but are skeptical of others’ Investors who are initially uninformed believe that early-informed investors have learned little, leading the former investors to provide excess liquidity, which, in turn, causes underreaction and short-run momentum. Skeptical investors can also react to stale information, causing momentum, followed by reversals. Hence, skepticism generates both momentum and reversals; the latter are amplified if investors overassess their own signal precision. We explain how long-run reversals can disappear while shorter-term momentum prevails, provide empirical implications, and link momentum to liquidity and price efficiency.

JEL-codes: G12 G14 G41 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (12)

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