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Momentum Trading, Contrarian Trading and Smart Money Manipulation

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  • Chung-Chih Liao

Abstract

There are two commonly recognized anomalies in the stock market, namely short-run momentum and long-run reversals. Under these two financial market anomalies, there are two trading strategies – momentum trading and contrarian trading – that can be adopted for the purpose of making profits. We model an asset market in which momentum traders, contrarian traders and informed rational speculators make transactions. We discovered that under certain conditions, the self-profiting motive of informed speculators will lead to their price manipulation behaviors, and result in momentum and reversals phenomenon on the asset price. We also found that the scenario of the relative quantity of the two types of behavioral traders and their profit margins is similar to that of a minority game.

Suggested Citation

  • Chung-Chih Liao, 2017. "Momentum Trading, Contrarian Trading and Smart Money Manipulation," International Business Research, Canadian Center of Science and Education, vol. 10(2), pages 53-62, February.
    • Handle: RePEc:ibn:ibrjnl:v:10:y:2017:i:2:p:53-62
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    References listed on IDEAS

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    Cited by:

    1. Day, Min-Yuh & Ni, Yensen, 2023. "Do clean energy indices outperform using contrarian strategies based on contrarian trading rules?," Energy, Elsevier, vol. 272(C).
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    3. Min-Yuh Day & Yensen Ni & Chinning Hsu & Paoyu Huang, 2022. "Do Investment Strategies Matter for Trading Global Clean Energy and Global Energy ETFs?," Energies, MDPI, vol. 15(9), pages 1-15, May.
    4. Day, Min-Yuh & Ni, Yensen, 2023. "The profitability of seasonal trading timing: Insights from energy-related markets," Energy Economics, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    momentum; contrarian; smart money; price manipulation; heterogeneous agents;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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