News, Not Trading Volume, Builds Momentum

Do momentum strategies work? Australian evidence

“…They show that trading volume is only weakly correlated with traditional liquidity proxies and that the volume effect is robust to various risk adjustments. However, Scott et al (2003) propose that the predicting power of the price momentum and trading volume is a result of the under reaction of investors to earnings news -an effect that is most pronounced for high-growth companies. Wang (1994) suggests that the dynamic relation between volume and returns varies depending upon the motive for trading by the " informed investors".…”

Applications of news analytics in finance: A review

“…Investors fail to price the information efficiently, leaving an opportunity for quantitative investors. Scott, Xu and Stumpp (2003) conclude that price momentum is caused by under reaction of stocks to earnings related news. This is contrary to prior literature which suggested that price momentum was connected to trading volume.…”

Australian momentum: performance, capacity and the GFC effect

“…There is a strong debate within the investment community as to whether momentum is consistent with traditional risk‐premium or behavioural theory. In the behavioural theory, the momentum effect is attributed to the way investors underreact to firm‐specific information (Chan et al ., ; Barberis et al ., ; Scott et al ., ), overreact to consistent patterns of good or bad news (Barberis et al ., ), to an alternate psychological bias regarding the way investors are influenced by the available information (Daniel et al ., ), or to their own prior results (Grinblatt and Han, ), or influenced by recommendations from analysts focused on past stock returns (Muslu and Xue, ), or herding in general (Demirer et al ., ). In the risk‐based theory, the outperformance due to momentum is a compensation for additional risk (Fama, , ; Fama and French, ).…”