A Brain-Based Foundation for Momentum

Is momentum a psychology-based phenomenon or is momentum driven by earning fundamentals? Applying predictive processing from brain sciences, I show that a new explanation emerges in which momentum is jointly driven by earning fundamentals and psychology-based mechanisms. The following novel insights emerge and are consistent with empirical evidence: (i) Momentum is stronger in high-performing sectors. (ii) Momentum gets weaker as attention from investors increases. (iii) Momentum is stronger overnight. (iv) Momentum is weaker during unusual times. (v) Momentum stocks respond asymmetrically to positive vs. negative earning news. Overall, this article shows that the brain is an exciting new frontier for momentum research to explore.