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Distinguishing Rational and Behavioral Models of Momentum

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  • Dongmei Li

    (Rady School of Management, University of California, San Diego, USA)

Abstract

One of the many challenges facing financial economists is to distinguish the theories explaining momentum. Brav and Heaton (2002) show that it is very difficult to distinguish the "rational" models of structural uncertainty (SU) from "behavioral" models of conservatism (C). In this paper, I reexamine the SU model and the C model proposed by Brav and Heaton (2002) in explaining short-run momentum. Based on simulated data, I find that they differ from each other in the relation between agent's earnings forecast revision and the lagged earnings change. This relation is significantly negative for the SU model and significantly positive for the C model. Empirical evidence provides support for the SU model.

Suggested Citation

  • Dongmei Li, 2013. "Distinguishing Rational and Behavioral Models of Momentum," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03n04), pages 1-30.
    • Handle: RePEc:wsi:qjfxxx:v:03:y:2013:i:03n04:n:s2010139213500146
    DOI: 10.1142/S2010139213500146
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    Cited by:

    1. Goulding, Christian L. & Harvey, Campbell R. & Mazzoleni, Michele G., 2023. "Momentum turning points," Journal of Financial Economics, Elsevier, vol. 149(3), pages 378-406.

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