Mechanisms of overpricing: An investigation on momentum crashes

This paper documents asymmetric overpricing for loser stocks across business cycle. In time of normal market conditions, we find strong interactions among key factors in determining momentum strength, and they are subject to significant investor attention. By contrast, during periods of poor market conditions, many of these interactions are not observed, suggesting that overpricing errors for loser stocks are generally weaker due to the lack of investor confidence and funding liquidity issue. A cross-sectional sample selection based on overpricing mechanism of loser stocks suggests that the damaged from momentum crashes can be eased and momentum profits can be significantly enhanced.