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On the relationship between concentration of prospect theory/mental accounting investors, cointegration, and momentum

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  • Bhootra, Ajay
  • Hur, Jungshik

Abstract

We examine the role of cointegration between stock prices and their estimated fundamental values in return momentum. We find that the positive relationship between capital gains overhang and future stock returns in Grinblatt and Han (2005) is significantly stronger among the “non-cointegrated” group of stocks as compared with the “cointegrated” group of stocks. Further, for the cointegrated stocks, the slower the speed of adjustment to the cointegrating equilibrium, the greater (smaller) is the future return of stocks with unrealized capital gains (losses). These findings are robust to various firm characteristics including firm size, book-to-market ratio, past returns, idiosyncratic volatility, dispersion in analysts’ earnings forecasts, turnover, individual investor ownership, and industry returns.

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  • Bhootra, Ajay & Hur, Jungshik, 2012. "On the relationship between concentration of prospect theory/mental accounting investors, cointegration, and momentum," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1266-1275.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1266-1275
    DOI: 10.1016/j.jbankfin.2011.11.021
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    More about this item

    Keywords

    Prospect theory; Mental accounting; Cointegration; Momentum;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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