Module 31.4, LOS 31.p: Momentum indicators in valuation

Momentum indicators look at fundamental variables like price and EPS in the context of a time series of historical or expected value.

Unexpected earnings or earnings surprise is the difference between expected and actual earnings:

               Earnings surprise = reported EPS – expected EPS

Earnings surprises can lead to persistent abnormal positive returns. We can also scale this measure, for instance using the standardized unexpected earnings indicator:

               SUE = earnings surprise/standard deviation of earnings suprise

Relative strength indicators compare a stock’s price or return performance during a given time period with its own historical performance or with some group of peer stocks. The economic rationale is that patterns of persistence or reversal may exist in stock returns. These are thought to possibly depend on the length of an investor’s time horizon.

Table of Contents

Leave a Comment