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Momentum effect in stocks’ returns between the rational and the behavioural financial theories: Proposition of the progressive rationality

International Journal of Finance & Banking Studies

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Title Momentum effect in stocks’ returns between the rational and the behavioural financial theories: Proposition of the progressive rationality
 
Creator Zoghlami, Faten
 
Subject finance
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Description     The puzzling momentum strategies’ payoffs defied the rational financial theory asserting the stocks returns’ unpredictability. Moreover, the momentum effect persist the main stocks returns’ anomaly escaping any risk-based explanation. The resilience of this phenomenon had favoured the development of behavioural financial field, which breaks with the investor’ full rationality hypothesis. This paper attempts to reconcile between the rational and behavioural financial theories, through the introduction of the progressive rationality concept. Especially, we argue that recognizing the temporary inappropriate investors’ reactions; can resolve the puzzling momentum anomaly. To fulfil our objective, we identify the appropriate autoregressive level that captures the significant autocorrelations involved by the investors’ over and under reactions. Then, we explore the profitability of the 6/6 momentum strategy implemented on the adjusted stocks’ returns. The adjusted momentum strategy is still profitable but no longer puzzling, since the related excess return is henceforth fully captured by a β and a size effect.Key words: Tunisian momentum effect, the rational finance theory, the behavioural finance theory, the three-factorial model and the autoregressive process.
 
Publisher SSBFNET
 
Contributor —
 
Date 2013-01-02
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://www.ssbfnet.com/ojs/index.php/ijfbs/article/view/30
 
Source International Journal of Finance & Banking Studies (ISSN: 2147- 4486); Vol 2, No 1 (2013): January; 1-10
2147-4486
 
Language eng
 
Relation http://www.ssbfnet.com/ojs/index.php/ijfbs/article/view/30/378