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Momentum: An Economic View

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  • Wilhelm Berghorn
  • Sascha Otto

Abstract

Momentum strategies have widely been recognized in the literature for several markets, asset classes and time horizons. However, these strategies face a major objection as they significantly violate even the weak form of the efficient market hypothesis. Recently, it has been shown that, from a mathematical perspective, the inner dynamics of asset prices are better described by the Mandelbrot Market Model. This model uses fractal trends observed in real stock data, and the mathematical characteristics measured and used in the model show that trends in this fractal setup explain momentum. A central question attached to this mathematical analysis is why these long trends exist, economically. Although it has been documented well in the literature that investors are not rational and are prone to several biases, we show in this work by example that momentum strategies leverage fundamental, company-specific improvements of the business condition, capturing the value generation process. Consequently, this work supports the mathematical claims made previously: There are no efficient markets as investors constantly fail to anticipate available information.

Suggested Citation

  • Wilhelm Berghorn & Sascha Otto, 2017. "Momentum: An Economic View," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 8(3), pages 142-153, July.
    • Handle: RePEc:jfr:ijfr11:v:8:y:2017:i:3:p:142-153
    DOI: 10.5430/ijfr.v8n3p142
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    References listed on IDEAS

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    Keywords

    momentum effect; efficient market theory;

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