Attempt to resolve the momentum effect enigma: Proposition of investors’ progressive rationality

Faten Zoghlami
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Faten Zoghlami: High Institute of Accounting and Business Administration, Manouba University

Journal of Asset Management, 2013, vol. 14, issue 4, No 5, 255-266

Abstract: Abstract This article aims to explain the puzzling excess returns of momentum strategies. Unlike previous research, this article fits into neither a fully rational framework nor into a fully behavioural framework. Rather it is positioned midway between the two and it argues that temporary investor irrationality is the main driver of momentum strategies’ returns. Specifically, the article documents significant and momentary autocorrelation in stock returns’ time series. Considered a correction of an investor’s momentary overreaction, the article gives evidence that these time series autocorrelations are the main driver of the momentum effect in stock returns. Using monthly returns inherent to 922 stocks listed on 10 MENA stock markets, from January 2000 to December 2009, we examine momentum strategy’s excess returns before and after considering the autocorrelation in stock returns’ time series. The results show that momentum strategy is still profitable, but no longer puzzling. Furthermore, the article hints that the momentum effect is stronger when the market is thinner.

Keywords: momentum strategies’ returns; momentum effect; three-factor model; autoregressive process; rational and behavioural financial theories (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1057/jam.2013.15

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