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Analysts’ underreaction and momentum strategies

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  • Azevedo, Vitor
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.

Suggested Citation

  • Azevedo, Vitor, 2023. "Analysts’ underreaction and momentum strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    • Handle: RePEc:eee:dyncon:v:146:y:2023:i:c:s0165188922002639
    DOI: 10.1016/j.jedc.2022.104560
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    More about this item

    Keywords

    Analysts’ predictable error; Analysts’ forecasts; Momentum; Post-earnings announcement drift; Stock market anomaly;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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