Momentum Returns in the Spanish Stock Market: Model Misspecification or Investor Irrationality?

Abstract

Previous evidence has demonstrated that the momentum effect is present in the Spanish stock market, and that it can not bee explained neither by the CAPM nor the Fama & French (1993) three factor model. The aim of this paper is to deepen in the possible explanations of such phenomenon by analyzing two new items. In the first part, the possibility that the momentum profits were the recompense for bearing some kind of risk not incorporated in this two models has been studied. Given the failure of this first approach, in the second part, the behavioural models of Daniel et al. (1998) and Hong and Stein (1999) have been tested, by facing the momentum profits to the size, book-to-market and analyst coverage characteristics. While the results show that the momentum profits focus on small stocks, restrictions in the data hinder to obtain conclusive results regarding the validity of these two models in explaining the Spanish momentum.

Keywords: momentum, risk factors, behavioural models

JEL Classification: G14, G11, G12