Price Reaction to Momentum Trading and Market Equilibrium
This paper analyzes a financial market with noise trading and momentum trading, and shows how momentum trading affects the market equilibrium. When momentum traders dominate the market, whether trend-chasing or contrarian, the private information owned by informed trader is not incorporated into the price, and so the price is less informative. If trend-chasing traders trade intensively in the market, the bubble phenomenon may occur and the price rises even when the true value of the asset is low. The transparency of the firm's accounting is a key factor to avert the bubble
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