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This paper examines the validity of the behavioral explanations of the momentum effect.
Although, the momentum effect seems to be captured by the risk based asset pricing
models, there are behavioral explanations developed to explain the existence of the
momentum. Barberls, Shleifer and Vishny (BSV) (1998) and Daniel, Hirshleifer and
Subrahmanyam (DHS) (1998) provide two most logical behavioral explanations tor the
existence of the momentum effect However, these behavioral explanations are not
generally accepted due to lack of empirical validity. Hence without identifying the real
market validity of theses behavioral explanations it Is difficult to reach any conclusion
regarding the reason for the existence of the momentum effect Therefore, based on
B SV (1998) and DHS (1998), this study formulates testable hypotheses to evaluate their
empirical validity. We develop event based method to test the behavioral explanations
of the momentum effect empirically. Finally hypotheses are tested in the Colombo Stock
Exchange over the period from 2005 to 2013 using the event based method. Investors'
conservative behavior suggested by BSV (1998) seems to have contributed to the
momentum effect In the Colombo Stock Exchange but the overreaction of DHS (1998) Is
not supported.
