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Different momentum effects across countries: An explanation based on investors' behavior

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  • Guoxiao Xia
  • Changsheng Hu
  • Huosong Xia
  • Yangchun Chi

Abstract

We establish a model in which speculators use feedback trading characteristics to infer the behavior of irrational investors and induce them to trade. We also discuss the stability and time series of asset prices. Our results show that: (1) speculators have speculation and arbitrage demands and make “noise” to induce irrational investors to trade, (2) the time series of asset prices show stable momentum and a reversal effect when fundamental traders dominate the market, and (3) momentums are unstable and perform poorly under extreme circumstances. Our article offers a unique approach to understanding the micro mechanism of different momentum effects in various markets and suggests a plausible theoretical framework to illustrate such differences.

Suggested Citation

  • Guoxiao Xia & Changsheng Hu & Huosong Xia & Yangchun Chi, 2023. "Different momentum effects across countries: An explanation based on investors' behavior," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(4), pages 1141-1163, December.
    • Handle: RePEc:bla:jfnres:v:46:y:2023:i:4:p:1141-1163
    DOI: 10.1111/jfir.12351
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