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The fundamentals of momentum investing: European evidence on understanding momentum through fundamentals
Author(s) -
Walkshäusl Christian
Publication year - 2019
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12462
Subject(s) - momentum (technical analysis) , economics , equity (law) , financial economics , ex ante , econometrics , monetary economics , keynesian economics , political science , law
This paper tests Ahmed and Safdar's noise‐related fundamentals‐based explanation for the momentum premium in European equity markets. Consistent with the view that past price changes may be partially driven by noise, the future return behaviour of winners and losers is significantly dependent upon the degree to which past price performance is consistent with fundamentals. European momentum profits are concentrated among those firms where past price performance is congruent with fundamentals, but absent among those firms where past price performance is incongruent with fundamentals. The significantly different momentum premiums on congruent and incongruent fundamentals‐momentum strategies are attributable to the exploitation of existing mispricing among momentum stocks that can be ex ante identified using firm fundamentals.