Question

7. What are the rational and irrational reasons that can generate the momentum return? (5)

Answer 1

The momentum effects in stocks returns calls into question the rational financial theory, prediction that suppose efficiency and the unpredictability of stocks returns. Moreover it escapes to any rational and risk based explanation. Many behavioral financial researchers use puzzling phenomenon as argument to extrapolate the psychologists ' experiences results and to break with market efficiency and with the investors' full rationality.

We can say the adjusted momentum strategy returns seem to be fully explained as market premium to some size effect and to high sensibility to the market variations.