Momentum Strategies

TLDR

The study tests whether future return predictability stems from market underreaction to past earnings news. Past returns and earnings surprises predict sizable future drifts, but these are not driven by market risk, size, or book‑to‑market factors, and high‑momentum stocks show few reversals, indicating a market that reacts slowly to new information.

Abstract

ABSTRACT We examine whether the predictability of future returns from past returns is due to the market's underreaction to information, in particular to past earnings news. Past return and past earnings surprise each predict large drifts in future returns after controlling for the other. Market risk, size, and book–to–market effects do not explain the drifts. There is little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Security analysts' earnings forecasts also respond sluggishly to past news, especially in the case of stocks with the worst past performance. The results suggest a market that responds only gradually to new information.