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Analyst and Momentum in Emerging Markets
Department of Finance and Accounting
National University of Singapore
Researchers have developed a number of theories to explain stock return continuation.
Using stock data from 16 emerging markets (1990 to 2002), we conduct an out-of-sample
test for the sources of momentum profitability. This paper examines the role of financial
analyst in the exhibited stock return continuation among emerging markets. Consistent
with the predictions of the gradual information diffusion theory (Hong and Stein, 1999),
the evidence indicates that momentum strategies are most profitable in small firms, firms
with low analyst coverage. More interestingly, we find that besides the level of analyst
following, the change in analyst following, specifically, increasing analyst coverage, and
the analyst forecasts with high dispersion can help explain stock return momentum.
Key words: analyst coverage, forecast dispersion, momentum
*I am especially grateful to my supervisor, Allaudeen Hameed, for his invaluable guidance and
encouragement. Thanks also to the seminar participants at NUS for helpful comments and suggestions.
And thanks to IBES for providing detailed analyst information. All rema ining errors are mine.
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Recent empirical finance research has documented one interesting return pattern, namely,
return continuation, which challenges the efficient market hypothesis. Most typically,
Jegadeesh and Titman (1993) showed that stock returns are positively correlated at short
or medium horizons : momentum strategies that buy prior winners and sell prior losers
make profit about 1 percent per month over the following 12 months.
Now there is an ongoing debate regarding the source for the predictability of stock return
based on past information. Some researchers attribute it to data snooping, but this is
unlikely given the abundant empirical evidence of momentum profit, which is