Reexamining momentum proﬁts: Underreaction
or overreaction to ﬁrm-speciﬁc information?
Published online: 26 July 2014
Ó Springer Science+Business Media New York 2014
Abstract We design a new measure and ﬁnd that the predictability of past returns on future
returns increases as stocks respond with delay to ﬁrm-speciﬁc information. Our results suggest
that momentum is caused by both investors’ underreaction and overreaction to information.
However, underreaction to information seems to be the primary cause, particularly during the
more recent period. Our ﬁndings are robust for recent explanations of momentum proﬁts and
alternative methods for computing our measure. We also ﬁnd that stocks respond with delay to
ﬁrm-speciﬁc information, partly due to certain ﬁrm characteristics, and partly because they
escape investor attention due to their low visibility. Our paper extends and reﬁnes Jegadeesh
and Titman’s (J Financ 56(2):699–720, 2001) ﬁnding that momentum proﬁts are consistent
with behavioral models’ predictions regarding investors’ overreaction.
Keywords Momentum Á Cointegration Á Underreaction Á Overreaction
JEL Classiﬁcation G12 Á G14 Á G20
Stock price momentum is a robust anomaly present in the stocks of all market capitalizations
and has continued unabated since its discovery by Jegadeesh and Titman (1993). Using more
recent time periods, Jegadeesh and Titman (2001) conﬁrm that momentum strategy stays
proﬁtable out-of-sample. Haugen and Baker (1996), Rouwenhorst (1998), and Grifﬁn et al.
(2003) ﬁnd that momentum strategies are reliably proﬁtable in a number of international
Department of Economics and Finance, College of Business, Louisiana Tech University,
Ruston, LA, USA
V. Singh (&)
Department of Accounting and Finance, College of Business, University of Michigan, Dearborn,
Dearborn, MI, USA
Rev Quant Finan Acc (2016) 46:261–289