Heterogeneous Beliefs and Momentum Profits

Verardo, Michela

doi:10.2139/ssrn.725761

Cited by 46 publications

(45 citation statements)

References 36 publications

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“…Table 12 reports results for comparison tests between the less‐ and more‐transparent REITs on the basis of size, price volatility and turnover. These measures are commonly found in the financial economics literature as proxies for heterogeneous beliefs; a recent example can be found in Verado (2009). Size is hypothesized to reduce heterogeneity and is often correlated with analyst coverage, though we argue that size is less susceptible to endogeneity issues than analysts‐based metrics.…”

Section: Heterogeneous Beliefs: a Refinementmentioning

confidence: 79%

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

Hong-hui

Downs

Patterson

2011

Real Estate Economics

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This article examines real estate investment trusts (REITs) to determine the correspondence between short interest and subsequent prices. The theoretical basis for our tests comes from the overvaluation conditions created by a combination of costly short selling and heterogeneous beliefs. This article exploits the unique characteristics of REITS as they are similar with respect to high dividend payouts and differentiated by underlying real asset investments. An innovative aspect of the methodology involves partitioning firms based on investment focus as a proxy for transparency and as a determinant of heterogeneous beliefs regarding valuation. The findings (i) affirm the information content of REIT short interest and (ii) highlight the importance of investment focus in resolving the divergence in investor opinions of value. Overvaluation conditions exist among REITs with greater short interest and less transparency, whereas such valuation conditions do not appear among transparent REITs, regardless of the level of short selling.Financial markets serve an essential role in the dissemination of information that is transmitted through the trading process and reflected in market prices. Yet some scholars have argued that markets do not always process information efficiently, hence market prices may deviate from fundamental value. Miller (1977) illustrates how the market price of a risky security may be overvalued due to a joint condition of costly short selling and heterogeneous investor beliefs. 1

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Section: Heterogeneous Beliefs: a Refinementmentioning

confidence: 79%

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

Hong-hui

Downs

Patterson

2011

Real Estate Economics

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“…Consistent with Zhang (2006) and Hong et al (2000), cross‐country differences in momentum are positively related to dispersion in analyst forecasts ( LnDisp ), but are negatively related to firm size ( LnSZ ). In contrast to Zhang (2006) and Verardo (2009), the estimated coefficient on stock market volatility ( LnV ) is negative. Based on joint F ‐tests, we conclude that the coefficients on this group of variables are reliably different from zero both with and without the individualism variable 33…”

Section: Other Determinants Of Cross‐country Momentum: Regressionmentioning

confidence: 83%

“…The variables that we consider have previously been used to proxy for the speed of information flow and information uncertainty. These variables include turnover (examined in Lee and Swaminathan (2000) and Verardo (2009)), firm size (examined in Jegadeesh and Titman (1993), Daniel and Titman (1999), Hong, Lim, and Stein (2000) and Zhang (2006)), analyst coverage (examined in Hong, et al (2000), Zhang (2006), and Verardo (2009)), cash flow volatility (examined in Zhang (2006)), dispersion in analyst forecasts (examined in Zhang (2006) and Verardo (2009)), and return volatility (examined in Zhang (2006) and Verardo (2009)). Following this earlier work we include the following variables: market trading volume ( TN ), average dispersion in analyst forecasts in a country ( Disp ), the average volatility of the individual stocks in a market ( V ), the volatility of the growth of cash flows ( Cfvol ) computed from each country's cash flow component of the Datastream global index, the median firm size in a country ( SZ ), and the average number of analysts following each stock in a country ( Ana ) 32…”

Section: Other Determinants Of Cross‐country Momentum: Regressionmentioning

confidence: 99%

Individualism and Momentum around the World

Chui¹,

Titman²,

Wei

2010

The Journal of Finance

1,140

633

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This paper examines how cultural differences influence the returns of momentum strategies. Cross-country cultural differences are measured with an individualism index developed by Hofstede (2001), which is related to overconfidence and selfattribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits.A SUBSTANTIAL LITERATURE EXAMINES what is generally referred to as the momentum effect-the observation that stocks that perform the best in the recent past continue to perform well in the future. For example, Titman (1993, 2001) find that stocks in the United States that realize the best (worst) returns over the past 3 to 12 months continue to perform well (poorly) over the subsequent 3 to 12 months. The profitability of momentum strategies is found in equity markets throughout the world (see, for example, Rouwenhorst (1998) for a study of momentum in Europe and Griffin, Ji, and Martin (2003) 362The Journal of Finance R for a study of momentum around the world). However, there are important exceptions, most notably in Asia (e.g., Chui, Titman, and Wei (2003)).Given the magnitude of momentum profits, about 12% per year in the United States and Europe, they are unlikely to be explained by risk-based theories. Indeed, most of the focus in the academic literature has been on behavioral explanations for this phenomenon.1 For example, Daniel, Hirshleifer, and Subrahmanyam (DHS, 1998) show how the momentum effect can be generated by investors' overconfidence and self-attribution bias and Barberis, Shleifer, and Vishny (BSV, 1998) and Hong and Stein (1999) show how momentum can be generated by investors' initial underreaction to information. This paper uses international data to examine the extent to which the momentum effect is generated by behavioral biases. In particular, we examine whether momentum profits are greater in those countries where investors are likely to exhibit the psychological biases discussed in the behavioral finance literature. Our focus is on what psychologists refer to as "individualism," which, according to Hofstede (2001), reflects the degree to which people focus on their internal attributes, such as their own abilities, to differentiate themselves from others. Specifically, we use an individualism index reported by Hofstede (2001) that is based on survey evidence from 50 countries.2 Although we are not aware of this index being used in the finance literature, Hofstede's individualism index and other cultural values have become widely accepted since Hofstede published his results in 1980 (Hofstede (1980)) and they have been used by many researchers in other business discipl...

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“…(1998), and Hong and Stein (1999) have developed behavioral models of momentum profits. Jegadeesh and Titman (2001), George and Hwang (2004), and Verardo (2009) have refined these theories and collected additional empirical evidence 1…”

Section: Introductionmentioning

confidence: 99%

Cross‐asset Style Momentum

Kim¹

2012

Asia-Pac J of Fin Stud

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Previous studies have demonstrated style momentum within equity markets. This paper reports significant momentum profits among style portfolios of multiple asset classes, showing that style momentum is not merely an equity market phenomenon, but a cross-asset phenomenon. A decomposition of profits reveals that profits are mostly attributable to positive autocorrelations of style returns. We interpret this result as being more consistent with underreaction models than with excess comovement and performance chasing models.

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Heterogeneous Beliefs and Momentum Profits

Cited by 46 publications

References 36 publications

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

The Information Content of REIT Short Interest: Investment Focus and Heterogeneous Beliefs

Individualism and Momentum around the World

Cross‐asset Style Momentum

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