Behavioral economics and Momentum

Behavioral Economics and Finance
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Institutional Affiliation
Behavioral Economics and Finance
Momentum is considered a peculiar anomaly in that in one or another, it deviates from the efficient markets paradigm. The term ‘efficiency’ conveys significant information in that it “denotes the fact that investors have no opportunity of obtaining abnormal profits from capital market transactions as compared to other investors, they cannot beat the market” (Titan, 2015, p. 442). Earnings and price momentums are the anomalies to this paradigm. To this end lies a number of propositions as to why this happens.
One explanation to the momentum effect is investor attention, which is highly predicated firm size and analyst coverage. In this case, it appears plausible that the investor is much more likely to focus on companies that are bigger because they attract more analyst coverage. However, momentum is much more prominent or greater in smaller companies that receive minimal coverage meaning that investor attention is central in lowering the momentum profitability. Besides the investor’s attention, no-news stock are bound to deter the level of momentum profitability. On the other hand, analysts’ recommendations have a tendency of attaining high trading volume as well as having positive past returns. However, when controlling for momentum is done, analysts’ recommendations elicit less predictability and even worse, they become no longer significant.
Another aspect in which to perceive the institutional versus individual investor proposition. Investor attention has been discussed previously as a source of momentum anomalies although the type of investor thereof has not been defined. In this regard, there is a group that bears higher responsibility for the presence of momentum witnessed than another. Institutional investor are akin to shorting stocks while...