Different momentum effects across countries: An explanation based on investors' behavior

Guoxiao Xia, Changsheng Hu, Huosong Xia and Yangchun Chi

Journal of Financial Research, 2023, vol. 46, issue 4, 1141-1163

Abstract: We establish a model in which speculators use feedback trading characteristics to infer the behavior of irrational investors and induce them to trade. We also discuss the stability and time series of asset prices. Our results show that: (1) speculators have speculation and arbitrage demands and make “noise” to induce irrational investors to trade, (2) the time series of asset prices show stable momentum and a reversal effect when fundamental traders dominate the market, and (3) momentums are unstable and perform poorly under extreme circumstances. Our article offers a unique approach to understanding the micro mechanism of different momentum effects in various markets and suggests a plausible theoretical framework to illustrate such differences.

Date: 2023
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