Interestingly, nobody knows how or why momentum happens. Researchers have since established some reasonable explanations to explain momentum. The more commonly accepted explanations are investors’ behaviour towards market trends – underreaction and overreaction to firms’ earnings announcement (Tobias Moskowitz, 2010). In terms of underreaction, investors may use past earnings information as an anchoring bias to react slowly to companies’ new information. The delayed reaction is reflected in the stock prices incrementally overtime and results in momentum. This explanation is evident in research papers such as investors’ inattentiveness to company information (Merton, 1987) and significant time taken for new information to be reflected in stock prices (Hong and Stein, 1999). The post-earnings announcement drift (Bernard and Thomas, 1989) was determined to be the result of underreaction (Appendix 1). On the flipside, investors could also overreact to new earnings information. Investors buy stocks when they notice the stock price rises, which may result in herding as more investors buying the stocks due to high sentiments towards the stock performance, thereby creating the bandwagon effect – the shift from the actual reflection of the stock prices creates the momentum effect. A strong distinct comparison with this effect is during the dot-com bubble in 2000, where a surge in tech stock prices is observed when there is an irrational demand for them (Appendix 2).


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