publication . Article . 2009

Forecast Accuracy Uncertainty and Momentum

Bing Han; Dong Hong; Mitch Warachka;
Open Access
  • Published: 01 Jan 2009 Journal: Management Science, volume 55, issue 6 June, pages 1,035-1,046
We demonstrate that stock price momentum and earnings momentum can result from uncertainty surrounding the accuracy of cash flow forecasts. Our model has multiple information sources issuing cash flow forecasts for a stock. The investor combines these forecasts into an aggregate cash flow estimate that has minimal mean-squared forecast error. This aggregate estimate weights each cash flow forecast by the estimated accuracy of its issuer, which is obtained from their past forecast errors. Momentum arises from the investor gradually learning about the relative accuracy of the information sources and updating their weights. Empirical tests validate the model's pred...
arXiv: Computer Science::Computational Engineering, Finance, and SciencePhysics::Atmospheric and Oceanic Physics
free text keywords: momentum, uncertainty, learning, Management Science and Operations Research, Strategy and Management
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