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A Prospect-Theoretical Interpretation of Momentum Returns

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Author Info
Menkhoff, Lukas
Schmeling, Maik

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Abstract

The puzzling evidence of seemingly high momentum returns is related to an understanding of risk as a simple covariance. If we consider, however, risk in higher-order statistical moments, momentum returns appear less advantageous. Thus, a prospect-theoretical assessment of US stock momentum returns provides a possible direction for explaining this puzzle.

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File URL: http://www.wiwi.uni-hannover.de/Forschung/Diskussionspapiere/dp-335.pdf
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Publisher Info
Paper provided by Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover with number dp-335.

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Length: 15 pages
Date of creation: May 2006
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Handle: RePEc:han:dpaper:dp-335

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Related research
Keywords: momentum trading market efficiency prospect theory

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  1. K. Geert Rouwenhorst, 1998. "International Momentum Strategies," Journal of Finance, American Finance Association, vol. 53(1), pages 267-284, 02. [Downloadable!] (restricted)
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  2. Michael S. Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Journal of Finance, American Finance Association, vol. 60(1), pages 523-534, 02. [Downloadable!] (restricted)
  3. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06. [Downloadable!] (restricted)
  4. Robert A. Korajczyk & Ronnie Sadka, 2004. "Are Momentum Profits Robust to Trading Costs?," Journal of Finance, American Finance Association, vol. 59(3), pages 1039-1082, 06. [Downloadable!] (restricted)
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  5. Arjan B. Berkelaar & Roy Kouwenberg & Thierry Post, 2004. "Optimal Portfolio Choice under Loss Aversion," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 973-987, 02. [Downloadable!] (restricted)
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  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  7. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February. [Downloadable!] (restricted)
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  8. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December. [Downloadable!] (restricted)
  9. Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside Risk," NBER Working Papers 11824, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February. [Downloadable!] (restricted)
  11. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March. [Downloadable!] (restricted)
  12. Narasimhan Jegadeesh, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, 04. [Downloadable!] (restricted)
  13. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment1," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September. [Downloadable!] (restricted)
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