Distinguishing Rational and Behavioral Models of Momentum

Dongmei Li ()
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Dongmei Li: Rady School of Management, University of California, San Diego, USA

Quarterly Journal of Finance (QJF), 2013, vol. 03, issue 03n04, 1-30

Abstract: One of the many challenges facing financial economists is to distinguish the theories explaining momentum. Brav and Heaton (2002) show that it is very difficult to distinguish the "rational" models of structural uncertainty (SU) from "behavioral" models of conservatism (C). In this paper, I reexamine the SU model and the C model proposed by Brav and Heaton (2002) in explaining short-run momentum. Based on simulated data, I find that they differ from each other in the relation between agent's earnings forecast revision and the lagged earnings change. This relation is significantly negative for the SU model and significantly positive for the C model. Empirical evidence provides support for the SU model.

Keywords: Momentum; conservatism; uncertainty (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2010139213500146

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