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

40 Pages Posted: 14 May 2004  

Carlos Forner

Universidad de Alicante-Dpto. Economía Financiera

Joaquin Marhuenda

Universidad de Alicante - Department of Economic Analysis

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

Suggested Citation

Forner, Carlos and Marhuenda, Joaquin, Momentum Returns in the Spanish Stock Market: Model Misspecification or Investor Irrationality?. EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=492303 or http://dx.doi.org/10.2139/ssrn.492303

Carlos Forner Rodríguez (Contact Author)

Universidad de Alicante-Dpto. Economía Financiera ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain

Joaquin Marhuenda Fructuoso

Universidad de Alicante - Department of Economic Analysis ( email )

Economia Financiera, Contabilidad y Marketing
E-03080 Alicante
Spain
965 90 36 11 (Phone)
965 90 36 21 (Fax)

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