Momentum Strategies





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    • Department of Finance, College of Commerce and Business Administration, University of Illinois at Urbana–Champaign. We thank for their comments Mark Carhart, Eugene Fama (the referee), David Ikenberry, Prem Jain, Charles Jones, Jason Karceski, Tim Loughran, Jay Ritter, René Stulz, and an anonymous referee, as well as seminar participants at Arizona State University, 1996 Berkeley Program in Finance, the Chicago Quantitative Alliance Third Annual Conference, the Institute for International Research Conference on Behavioral Finance, the NBER Summer 1995 Institute on Asset Pricing, the Second Annual Conference on the Psychology of Investing, the University of Illinois, the University of Southern California, the University of Toronto and Yale University. We also thank Qiong Zhang for research assistance. Partial computing support was provided by the National Center for Supercomputing Applications, University of Illinois at Urbana–Champaign.


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.