Portfolio construction based on information uncertainty measures and its effects on momentum return

Abstract

One of the key areas of behavioral finance is investor's reaction to the uncertain environment in which is located where a series of factors, investor's individual and social psychology and experience, are involved in his/her decision-making. In fact, information uncertainty has been considered by different researchers as one of the realities of financial trade environment, particularly related to behavioral finance. To the extent that most of studies have recognized it as the basis of the formation of behavioral errors, including initial under-reaction (due to the conservatism and anchoring) or overreaction to the new released news that leads to momentum return. But there is no Consensus to measure information uncertainty. This study aimed to examine new measurement to determine information uncertainty based on firm specific factors. our results show that this method of, momentum portfolio construction leads more return comparing older method using other criteria for measuring information uncertainty.