European Price Momentum and Analyst Behavior. van Dijk, R., & Huibers, F. (2002)

The authors are studying price momentum across several European countries over the period 1987 - 1999.  Specifically they want to analyze the prevalence of earnings surprises, which would suggest the cause of momentum returns to be the underreaction to information, as has been previously studied.

They formed their porfolios similarly to prior researchers and ranked the portfolios into deciles of past returns, for 1/3/6/12 month holding periods.  They find a monotonic increase in returns in all formation periods.  Also, they provide risk-adjusted returns (i.e., controlled for size, value, market, and country risk), which show a monotonic increase in alpha as the past returns increase; however, the alpha is only positive in the top 3-4 deciles. 

Next, the authors explore the relationship between momentum returns, and those attributable to the value, size, and earnings growth factors.  They hope to determine whether momentum returns are in fact just returns to value, size or earnings growth expectations.  Regarding the value factor, they find that the momentum returns and the value returns are negatively related; the momentum returns are negatively related to the market cap; and the expected earnings growth is not related to momentum.  Therefore, they find momentum is effective on a stand-alone basis and is not supplanted by other factors.

Next, the authors look at earnings surprises for each of the deciles of momentum portfolios.  They find that as the past returns increase, so do the earnings surprises.  The authors suggest that analysts tend to be too pessimistic in their forecasts of past winner portfolios and too optimistic in their forecasts of past loser portfolios.  They also find that the higher momentum portfolios also tend to have higher earnings forecast revisions than do the lower momentum portfolios.  Finally, the higher momentum portfolios tend to have a higher percentage of positive earnings forecast revisions than do lower momentum portfolios.

van Dijk, R., & Huibers, F. (2002). European Price Momentum and Analyst Behavior. Financial Analysts Journal, 58(2), 96.

https://doi.org/10.2469/faj.v58.n2.2526

Previous studies have found evidence that selecting stocks with positive price momentum is effective in the U.S., European, and emerging stock markets periods up to a year. The reasons that historical price momentum forecasts the direction and magnitude of stock returns, however, are not clear. Insight into the determinants of price momentum would allow investors to judge whether and how price momentum should play a role in their investment strategies. Studying the European stock markets, we found that positive price momentum is caused by analyst underreaction to new earnings information. We found earnings surprises, expected earnings growth, and earnings revisions to be systematically related to historical price movements. Importantly, the data show that European price momentum is distinct from the widely documented value and size effects. Our findings clarify the benefits of assessing analyst behavior to predict whether momentum investing might work in the next period.