Information percolation, momentum and reversal
We propose a joint theory of time-series momentum and reversal based on a rational-expectations model. We show that a necessary condition for momentum to arise in this framework is that information flows at an increasing rate. We focus on word-of-mouth communication as a mechanism that enforces this...
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| Veröffentlicht in: | Journal of financial economics 2017-03, Vol.123 (3), p.617-645 |
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| container_end_page | 645 |
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| container_title | Journal of financial economics |
| container_volume | 123 |
| creator | Andrei, Daniel Cujean, Julien |
| description | We propose a joint theory of time-series momentum and reversal based on a rational-expectations model. We show that a necessary condition for momentum to arise in this framework is that information flows at an increasing rate. We focus on word-of-mouth communication as a mechanism that enforces this condition and generates short-term momentum and long-term reversal. Investors with heterogeneous trading strategies—contrarian and momentum traders—coexist in the marketplace. Although a significant proportion of investors are momentum traders, momentum is not completely eliminated. Word-of-mouth communication spreads rumors and generates price run-ups and reversals. Our theoretical predictions are in line with empirical findings. |
| doi_str_mv | 10.1016/j.jfineco.2016.05.012 |
| format | Article |
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| fulltext | fulltext |
| identifier | ISSN: 0304-405X |
| ispartof | Journal of financial economics, 2017-03, Vol.123 (3), p.617-645 |
| issn | 0304-405X 1879-2774 |
| language | eng |
| recordid | cdi_proquest_miscellaneous_1891440603 |
| source | Elsevier ScienceDirect Journals |
| subjects | Asset pricing Communication Equilibrium Information percolation Investors Momentum Rational expectations Studies Time series |
| title | Information percolation, momentum and reversal |
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