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Cognitive dissonance, sentiment, and momentum
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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 ISSN 0022-1090.
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Official URL: http://dx.doi.org/10.1017/S0022109012000592
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 | ||||
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Subjects: | H Social Sciences > HG Finance | ||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Behavioural Science Faculty of Social Sciences > Warwick Business School |
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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: |
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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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