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Price Reaction to Momentum Trading and Market Equilibrium

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  • Katsumasa NISHIDE

Abstract

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

Suggested Citation

  • Katsumasa NISHIDE, 2004. "Price Reaction to Momentum Trading and Market Equilibrium," Computing in Economics and Finance 2004 113, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:113
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    More about this item

    Keywords

    market microstructure; momentum trading;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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