Antoniou, Constantinos, Doukas, John A. and Subrahmanyam, Avanidhar (2013) Cognitive dissonance, sentiment, and momentum. Journal of Financial and Quantitative Analysis, Volume 48 (Number 1). pp. 245-275. doi:10.1017/S0022109012000592

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Abstract

We consider whether sentiment affects the profitability of momentum strategies. We hypothesize that news that contradicts investors’ sentiment causes cognitive dissonance, slowing the diffusion of such news. Thus, losers (winners) become underpriced under optimism (pessimism). Short-selling constraints may impede arbitraging of losers and thus strengthen momentum during optimistic periods. Supporting this notion, we empirically show that momentum profits arise only under optimism. An analysis of net order flows from small and large trades indicates that small investors are slow to sell losers during optimistic periods. Momentum-based hedge portfolios formed during optimistic periods experience long-run reversals.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Behavioural Science Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Financial crises, Optimism, Pessimism
Journal or Publication Title:	Journal of Financial and Quantitative Analysis
Publisher:	Cambridge University Press
ISSN:	0022-1090
Official Date:	February 2013
Dates:	Date Event February 2013 Published
Volume:	Volume 48
Number:	Number 1
Number of Pages:	31
Page Range:	pp. 245-275
DOI:	10.1017/S0022109012000592
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access

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