A Tale of Two Anomalies: The Implication of Investor Attention for Price and Earnings Momentum
Kewei Hou, Ohio State
Lin Peng, Baruch College
Wei Xiong, Princeton

We examine the role of investor attention in explaining the profitability of price and earnings momentum strategies. Using trading volume and market state to measure cross-sectional and time-series variations of investor attention, we find that price momentum profits are higher among high volume stocks and in up markets, but that earnings momentum profits are higher among low volume stocks and in down markets. In the long run, price momentum profits reverse but earnings momentum profits do not. These results suggest that price underreaction to earnings news weakens with investor attention, but price continuation caused by investors’ overreaction strengthens with attention.

Price and earnings momentum strategies are among the most common quantitative strategies that our members pursue. The inter-relationship between these two forms of momentum, and their separate dependencies on trading volume therefore should be of substantial interest to our members.