Download or read book Heterogeneous Beliefs and Momentum Profits written by Michela Verardo and published by . This book was released on 2007 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent theoretical models derive return continuation in a setting where investors have heterogeneous beliefs or receive heterogeneous information. This paper tests the link between heterogeneity of beliefs and return continuation in the cross-section of US stock returns. Heterogeneity of beliefs about a firm's fundamentals is measured by the dispersion in analyst forecasts of earnings. The results show that momentum profits are significantly larger for portfolios characterized by higher heterogeneity of beliefs. Predictive cross-sectional regressions show that heterogeneity of beliefs has a positive incremental effect on return continuation after controlling for variables measuring a stock's visibility, the speed of information diffusion, uncertainty about fundamentals, information precision, and volatility. The results in this paper are robust to the potential presence of short-sale constraints and are not explained by arbitrage risk.