European Momentum Strategies, Information Diffusion, and Investor Conservatism

30 Pages Posted: 22 Jun 2005

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Phillip J. McKnight

University of St. Andrews - School of Management

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Abstract

In this paper we conduct an out-of-sample test of two behavioural theories that have been proposed to explain momentum in stock returns. We test the gradual-information-diffusion model of Hong and Stein (1999) and the investor conservatism bias model of Barberis et al. (1998) in a sample of 13 European stock markets during the period 1988 to 2001. These two models predict that momentum comes from the (i) gradual dissemination of firm-specific information and (ii) investors' failure to update their beliefs sufficiently when they observe new public information. The findings of this study are consistent with the predictions of the behavioural models of Hong and Stein's (1999) and Barberis et al. (1998). The evidence shows that momentum is the result of the gradual diffusion of private information and investors' psychological conservatism reflected on the systematic errors they make in forming earnings expectations by not updating them adequately relative to their prior beliefs and by undervaluing the statistical weight of new information.

Suggested Citation

Doukas, John A. and McKnight, Phillip J., European Momentum Strategies, Information Diffusion, and Investor Conservatism. European Financial Management, Vol. 11, No. 3, pp. 313-338, June 2005, Available at SSRN: https://ssrn.com/abstract=736405

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

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Phillip J. McKnight

University of St. Andrews - School of Management ( email )

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