What is the logic behind this:
“Momentum can be partly explained by short-term underreaction to relevant information, and longer-term overreaction.”
To understand this statement you must turn on your chipset of “behavioral finance”. Remember that some bias like conservative bias, anchoring, confirmation, and other prevent the investor to process recent information so she ends up under-reacting to that information. In the case of a market momentum where investors move in a herd, they under react to fundamental analysis and reduce their cognitive dissonance by pledging to the majority of investors strategies. This means that they give up on short-term events and think more about longer terms (capital gains in the future). Obviously, momentum is not a long-term event, it will crash eventually (corrected by fundamental analysis).
Thank you!