The role of over-reaction and the disposition effect in explaining momentum in Latin American emerging markets

This paper analyzes the momentum effect in the four main Latin American stock markets. In the behavioural finance framework, the results obtained suggest that over-reaction and the disposition effect play a key role in explaining momentum. The Interaction of these two factors, which depend on the market state and the performance of winner and loser momentum portfolios in relation to the reference price, provide the key to explaining the intensity of the momentum and the likelihood of its long term reversal. The impact of over-reaction and the disposition effect is also shown to vary across stock markets, making it difficult to obtain simple findings of general validity.