Abstract
This paper examines the role of investor overconfidence and self‐attribution bias in explaining the momentum effect. We develop a novel measure of overconfidence based on characteristics and trading patterns of US equity mutual fund managers. Stocks held by more overconfident managers experience greater momentum profits and stronger return reversals than stocks held by less overconfident managers. The difference in momentum profits is not compensation for risk nor is it attributable to stock characteristics that influence momentum. Our results are consistent with Daniel, Hirshleifer, and Subrahmanyam (1998) who argue that momentum results from delayed overreaction caused by overconfidence and biased self‐attribution.
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