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Price Momentum and Reversal: An Information Cascade Rationale

Author

Listed:
  • Kaihua Deng

    (Hanqing Advanced Institute of Economics and Finance, Renmin University of China)

Abstract

I develop a model in which price momentum builds up as a result of in-vestors' rational learning. Investors make sequential buy or sell decisions based on the past history of price movements and a private signal. The private signal has a stronger impact in the early stage, but beyond certain point the influence gradually dies out and subsequent investors tend to follow the trend. In the presence of upward momentum, early buyers impose a negative externality on later buyers by increasing the incidence of large losses. A self-fulfilling reversal occurs once a correction factor is added to investors' valuation function.

Suggested Citation

  • Kaihua Deng, 2016. "Price Momentum and Reversal: An Information Cascade Rationale," Annals of Economics and Finance, Society for AEF, vol. 17(2), pages 281-302, November.
    • Handle: RePEc:cuf:journl:y:2016:v:17:i:2:deng
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Information cascade; Price momentum; Price reversal; Private signal;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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