Analysts' Underreaction and Momentum Strategies

49 Pages Posted: 10 May 2022 Last revised: 21 Nov 2022

See all articles by Vitor Azevedo

Vitor Azevedo

Department of Financial Management - RPTU Kaiserslautern-Landau

Date Written: April 18, 2022


I estimate a theory-based behavioral momentum using analysts' predictable (errors driven by) underreaction (APU) as a proxy for newswatchers underreaction. The results show that APU strongly predicts analysts' errors and, more importantly, stock returns. A long-short strategy based on APU generates a value-weighted Fama-French six-factor alpha of 0.85% per month (t-stat = 3.48). Furthermore, I propose an underreaction factor that subsumes the momentum factor in spanning tests and provide higher explanatory power for a wide range of return predictors. The results support behavioral explanations of the momentum effect and show that APU can better capture newswatchers' underreaction than traditional estimates.

Keywords: Analysts' predictable error, Analysts' forecasts, Momentum, Post-earnings announcement drift, Stock market anomaly

JEL Classification: G12, G29, M41

Suggested Citation

Azevedo, Vitor, Analysts' Underreaction and Momentum Strategies (April 18, 2022). Journal of Economic Dynamics and Control, Forthcoming, Available at SSRN: or

Vitor Azevedo (Contact Author)

Department of Financial Management - RPTU Kaiserslautern-Landau ( email )


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