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The explanatory power of representative agent earnings momentum models

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  • William Forbes
  • Aloysius Igboekwu

Abstract

This paper examines the predictive performance of two representative agent models of earnings momentum using the US S & P 500 sample frame in the years 1991–2006. For successive sequences of quarterly earnings outcomes over a three year horizon of quarterly increases/decreases, etc., we ask whether these models can capture the likelihood of reversion and, secondly, the stock market response to observed quarterly earnings change sequences for our chosen sample. We find evidence of a far greater frequency of persistent quarterly earnings rises and hence a more muted reaction to their occurrence. Persistent losses are both far less common and more salient in their impact on stock prices. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • William Forbes & Aloysius Igboekwu, 2015. "The explanatory power of representative agent earnings momentum models," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 473-492, April.
    • Handle: RePEc:kap:rqfnac:v:44:y:2015:i:3:p:473-492
    DOI: 10.1007/s11156-013-0414-4
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    More about this item

    Keywords

    Earnings momentum; Law of small numbers; Bayesian inference; G14; M4; G11;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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