Short-Term Momentum and Long-Term Reversal of Returns under Limited Enforceability and Belief Heterogeneity (with Pablo F. Bekery)

Abstract:
We evaluate the ability of the Lucas [28] tree and the Alvarez-Jermann [4] models, both with homogeneous as well as heterogeneous beliefs, to generate a time series of excess returns that displays both short-term momentum and long-term reversal at quarterly frequency. We calibrate the model to U.S. data as in Alvarez and Jermann [5]. We find that only the Alvarez-Jermann model with heterogeneous beliefs delivers autocorrelations that not only have the correct sign but are also of magnitude similar to the US data.