Momentum in Stock Returns Following Dispersion and Consensus in Analysts' Forecasts

Abstract: Our study shows that it is possible for an investor to employ profitable zero-cost portfolio strategies on the OMX Stockholm Benchmark Index that exploit momentum following analysts' forecasts. The significant alpha of the monthly rebalanced long-short portfolios suggests that the analysts' forecasts momentum should be exploited within a month. As predicted by earlier literature, we find a negative relationship between dispersion in analysts' forecast and future stocks returns, while a portfolio of low-dispersion stocks not necessarily outperforms. Our results on the liquid and investable OMX Stockholm Benchmark Index support that any market friction, not necessarily short-selling constraints, will produce the negative relation between dispersion in forecasts and future returns.