Momentum (finance)

Momentum (finance)

In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month (Jegadeesh and Titman, 1993, 1999).

The existence of momentum is a market anomaly, which finance theory struggles to explain. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Such increase, according to the efficient-market hypothesis, is warranted only by changes in demand and supply or new information (cf. fundamental analysis). Students of financial economics have largely attributed the appearance of momentum to cognitive biases, which belong in the realm of behavioral economics. The explanation is that investors are irrational (Daniel, Hirschleifer, and Subrahmanyam, 1998 and Barberis, Shleifer, and Vishny, 1998), in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of price bubbles, recent research has argued that momentum can be observed even with perfectly rational traders (Crombez, 2001).

References

  • Barberis, N., A. Shleifer, and R. Vishny. “A Model of Investor Sentiment.” Journal of Financial Economics, 49, 1998.
  • Crombez, J. "Momentum, Rational Agents and Efficient Markets." The Journal of Psychology and Financial Markets, 2, 2001.
  • Daniel, K., D. Hirschleifer, and A. Subrahmanyam. “A Theory of Overconfidence, Self-Attribution, and Security Market Under and Over-reactions.” Journal of Finance, 53, 1998.
  • Jegadeesh, N., and S. Titman. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48, 1993.
  • Jegadeesh, N., and S. Titman. “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations.” NBER Working paper #7159, 1999.

Wikimedia Foundation. 2010.

Игры ⚽ Поможем написать реферат

Look at other dictionaries:

  • Momentum investing — Momentum investing, also sometimes known as Fair Weather Investing , is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same… …   Wikipedia

  • Momentum (disambiguation) — Momentum is a concept in physics Momentum may also refer to: Contents 1 Financial economics 2 Media 2.1 Film …   Wikipedia

  • Momentum accounting and triple-entry bookkeeping — is an alternative accountancy system developed by Yuji Ijiri and is the title of the 1989 monograph that he wrote.[1] It is hard to imagine alternatives to the universal system of double entry bookkeeping, but this is one. In regular, double… …   Wikipedia

  • Momentum (analyse technique) — Le momentum est un indicateur d analyse technique utilisé par les intervenants en bourse. À l instar d autres indicateurs techniques, il donne des signaux d achat ou de vente sur des actifs financiers, comme par exemple des actions. Sommaire 1… …   Wikipédia en Français

  • Momentum trader — Contents 1 Definition 2 Event based momentum trader 3 Technicals based momentum trader 4 See also Definition …   Wikipedia

  • Position (finance) — Finance Financial markets Bond market …   Wikipedia

  • American Momentum Bank — Infobox Company company name = American Momentum Bank [ cite web|url=http://www.indeed.com/cmp/American Momentum Bank | title=Indeed Company Report – American Momentum Bank |accessdate=2008 09 29 |work=Indeed Reference] company company type =… …   Wikipedia

  • Behavioral Finance — Die Verhaltensökonomik (engl. Behavioural Economics) ist ein Teilgebiet der Wirtschaftswissenschaft. Sie beschäftigt sich mit menschlichem Verhalten in wirtschaftlichen Situationen. Dabei werden Konstellationen untersucht, in denen Menschen im… …   Deutsch Wikipedia

  • Short (finance) — Schematic representation of short selling in two steps. The short seller borrows shares and immediately sells them. He then waits, hoping for the stock price to decrease, when the seller can profit by purchasing the shares to return to the lender …   Wikipedia

  • Over-the-counter (finance) — Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the… …   Wikipedia

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”