IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v59y2022ics1062940821001868.html
   My bibliography  Save this article

An information diffusion model for momentum effect based on investor wealth

Author

Listed:
  • Yang, Haijun
  • Ge, Hengshun
  • Gao, Xinpeng

Abstract

We propose a private information diffusion model to explain the momentum, which considers different amounts of investor wealth and uses the proportion of informed investors’ wealth to measure information diffusion speed. Different distributions of investor wealth can lead to different information diffusion processes, and the speed of information diffusion is positively correlated with the concentration of investor wealth. Our empirical results reveal the relationship between momentum return and information diffusion speed by the S&P 500 stocks in two periods of the upmarket. The results show that stocks with faster information diffusion speed gain higher time-series momentum returns, especially under short holding period strategies. These results provide new evidence for the correlation between information diffusion and the momentum effect.

Suggested Citation

  • Yang, Haijun & Ge, Hengshun & Gao, Xinpeng, 2022. "An information diffusion model for momentum effect based on investor wealth," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001868
    DOI: 10.1016/j.najef.2021.101583
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940821001868
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2021.101583?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Harrison Hong & Terence Lim & Jeremy C. Stein, 2000. "Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies," Journal of Finance, American Finance Association, vol. 55(1), pages 265-295, February.
    2. Li, Jinfang, 2020. "The momentum and reversal effects of investor sentiment on stock prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    4. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
    5. John M. Griffin & Tao Shu & Selim Topaloglu, 2012. "Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections?," Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2155-2188.
    6. Hendershott, Terrence & Livdan, Dmitry & Schürhoff, Norman, 2015. "Are institutions informed about news?," Journal of Financial Economics, Elsevier, vol. 117(2), pages 249-287.
    7. Haijun Yang & Wei Xia, 2020. "Private Information Transmission, Momentum and Reversal," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(3), pages 311-322, July.
    8. Bing Han & Liyan Yang, 2013. "Social Networks, Information Acquisition, and Asset Prices," Management Science, INFORMS, vol. 59(6), pages 1444-1457, June.
    9. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    10. Liao, Li-Chuan & Chou, Ray Yeutien & Chiu, Banghan, 2013. "Anchoring effect on foreign institutional investors’ momentum trading behavior: Evidence from the Taiwan stock market," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 72-91.
    11. Alexander Molchanov & Jeffrey Stangl, 2018. "Investor sentiment and industry returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(4), pages 546-570, October.
    12. Bruce N. Lehmann, 1990. "Fads, Martingales, and Market Efficiency," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 1-28.
    13. Jiang Luo & Avanidhar Subrahmanyam & Sheridan Titman & Itay Goldstein, 2021. "Momentum and Reversals When Overconfident Investors Underestimate Their Competition," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 351-393.
    14. Moskowitz, Tobias J. & Ooi, Yao Hua & Pedersen, Lasse Heje, 2012. "Time series momentum," Journal of Financial Economics, Elsevier, vol. 104(2), pages 228-250.
    15. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    16. Athina Georgopoulou & Jiaguo (George) Wang, 2017. "The Trend Is Your Friend: Time-Series Momentum Strategies across Equity and Commodity Markets," Review of Finance, European Finance Association, vol. 21(4), pages 1557-1592.
    17. Martijn Cremers & Ankur Pareek, 2015. "Short-Term Trading and Stock Return Anomalies: Momentum, Reversal, and Share Issuance," Review of Finance, European Finance Association, vol. 19(4), pages 1649-1701.
    18. Jegadeesh, Narasimhan, 1990. "Evidence of Predictable Behavior of Security Returns," Journal of Finance, American Finance Association, vol. 45(3), pages 881-898, July.
    19. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    20. Emmanuel Saez & Gabriel Zucman, 2016. "Editor's Choice Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(2), pages 519-578.
    21. Andrei, Daniel & Cujean, Julien, 2017. "Information percolation, momentum and reversal," Journal of Financial Economics, Elsevier, vol. 123(3), pages 617-645.
    22. Bei Cui & Arie E. Gozluklu, 2016. "Intraday Rallies and Crashes: Spillovers of Trading Halts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(4), pages 472-501, October.
    23. Jiang Luo & Avanidhar Subrahmanyam & Sheridan Titman, 2021. "Momentum and Reversals When Overconfident Investors Underestimate Their Competition [The financial crisis of 2007–2009: Causes and remedies]," Review of Financial Studies, Society for Financial Studies, vol. 34(1), pages 351-393.
    24. repec:oup:rfinst:v:21:y:2017:i:4:p:1557-1592. is not listed on IDEAS
    25. Jiang Luo & Avanidhar Subrahmanyam & Sheridan Titman & Itay Goldstein, 0. "Momentum and Reversals When Overconfident Investors Underestimate Their Competition," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 351-393.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Simarjeet Singh & Nidhi Walia & Stelios Bekiros & Arushi Gupta & Jigyasu Kumar & Amar Kumar Mishra, 2022. "Risk-managed time-series momentum: an emerging economy experience," Journal of Economics, Finance and Administrative Science, Emerald Group Publishing Limited, vol. 27(54), pages 328-343, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kang, Joseph & Liu, Ming-Hua & Ni, Sophie Xiaoyan, 2002. "Contrarian and momentum strategies in the China stock market: 1993-2000," Pacific-Basin Finance Journal, Elsevier, vol. 10(3), pages 243-265, June.
    2. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.
    3. Raza, Ahmad & Marshall, Ben R. & Visaltanachoti, Nuttawat, 2014. "Is there momentum or reversal in weekly currency returns?," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 38-60.
    4. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2019. "Momentum and reversal in financial markets with persistent heterogeneity," Annals of Finance, Springer, vol. 15(4), pages 455-487, December.
    5. Parhizgari, A.M. & Nguyen, D., 2008. "ADRs under momentum and contrarian strategies," Global Finance Journal, Elsevier, vol. 19(2), pages 102-122.
    6. Hannah Lea Hühn & Hendrik Scholz, 2019. "Reversal and momentum patterns in weekly stock returns: European evidence," Review of Financial Economics, John Wiley & Sons, vol. 37(2), pages 272-296, April.
    7. Ardila-Alvarez, Diego & Forro, Zalan & Sornette, Didier, 2021. "The acceleration effect and Gamma factor in asset pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 569(C).
    8. Gao, Yang & Leung, Henry & Satchell, Stephen, 2022. "Partial moment momentum," Journal of Banking & Finance, Elsevier, vol. 135(C).
    9. Andy C W Chui & Avanidhar Subrahmanyam & Sheridan Titman, 2022. "Momentum, Reversals, and Investor Clientele [Illiquidity and stock returns: Cross-section and time-series effects]," Review of Finance, European Finance Association, vol. 26(2), pages 217-255.
    10. Yang Gao & Henry Leung & Stephen Satchell, 2018. "A critique of momentum strategies," Journal of Asset Management, Palgrave Macmillan, vol. 19(5), pages 341-350, September.
    11. Adam Majewski & Stefano Ciliberti & Jean-Philippe Bouchaud, 2018. "Co-existence of Trend and Value in Financial Markets: Estimating an Extended Chiarella Model," Papers 1807.11751, arXiv.org.
    12. Savor, Pavel G., 2012. "Stock returns after major price shocks: The impact of information," Journal of Financial Economics, Elsevier, vol. 106(3), pages 635-659.
    13. Martin H. Schmidt, 2017. "Trading strategies based on past returns: evidence from Germany," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 201-256, May.
    14. Avanidhar Subrahmanyam, 2005. "Distinguishing Between Rationales for Short‐Horizon Predictability of Stock Returns," The Financial Review, Eastern Finance Association, vol. 40(1), pages 11-35, February.
    15. Achim BACKHAUS & Aliya ZHAKANOVA ISIKSAL, 2016. "The Impact of Momentum Factors on Multi Asset Portfolio," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 146-169, December.
    16. Espinoza, Nicolás & Espinoza, Tomás, 2014. "The Momentum Effect In The Chilean Stock Market," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 12(1), pages 1-32.
    17. Jungshik Hur & Vivek Singh, 2016. "Reexamining momentum profits: Underreaction or overreaction to firm-specific information?," Review of Quantitative Finance and Accounting, Springer, vol. 46(2), pages 261-289, February.
    18. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    19. Andrei, Daniel & Cujean, Julien, 2017. "Information percolation, momentum and reversal," Journal of Financial Economics, Elsevier, vol. 123(3), pages 617-645.
    20. Hur, Jungshik & Singh, Vivek, 2019. "How do disposition effect and anchoring bias interact to impact momentum in stock returns?," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 238-256.

    More about this item

    Keywords

    Information diffusion speed; Momentum effect; Wealth distribution of investors; Behavior finance; Informed investor;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001868. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.