Do Informed Investors Cause Momentum?

Abstract:     
We show that there will be expected momentum in stock returns if there are informed and uninformed investors, and if informed investors know the mean of the stocks future fundamental value. We use analysts estimates to construct a truncated valuation formula and find not only that stock prices mimic current changes in value, but anticipate future changes in value, as predicted by the theory. This relationship in price and value occurs in periods before and after the momentum ranking period. Although the theory does not predict price reversals, we find that reversals fundamental values are associated with price reversals.

Keywords: Momentum effect, noisy rational expectations

JEL Classification: G00

Accepted Paper Series