A unified theory of underreaction, momentum trading and overreaction in asset markets-英文文献.pdf

THE JOURNAL OF FINANCE • VOL. LIV, NO. 6 • DECEMBER 1999 A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets HARRISON HONG and JEREMY C. STEIN* ABSTRACT We model a market populated by two groups of boundedly rational agents: “news- watchers” and “momentum traders.” Each newswatcher observes some private in- formation, but fails to extract other newswatchers’ information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trend- chasing. However, if they can only implement simple i.e., univariate strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of under- and overreactions, the model generates several other distinctive implications. OVER THE LAST SEVERAL YEARS , a large volume of empirical work has docu- mented a variety of ways in which asset returns can be predicted based on publicly available information. Although different studies have used a host of different predictive variables, many of the results can be thought of as belonging to one of two broad categories of phenomena. On the one hand, returns appear to exhibit continuation, or momentum, in the short to me- dium run. On the other hand, there is also a tendency toward reversals, or fundamental reversion, in the long run.1 It is becoming increasingly clear that traditional asset-pricing models— such as the capital asset pricing model CAPM of Sharpe 1964 and Lint- ner 1965, Ross’s 1976 arbitrage pricing theory APT, or Merton’s 1973 intertemporal capital asset pricing model ICAPM—have