Price Momentum and Reversal: An Information Cascade Rationale
Kaihua Deng ()
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Kaihua Deng: Hanqing Advanced Institute of Economics and Finance, Renmin University of China
Annals of Economics and Finance, 2016, vol. 17, issue 2, 281-302
I develop a model in which price momentum builds up as a result of in-vestors' rational learning. Investors make sequential buy or sell decisions based on the past history of price movements and a private signal. The private signal has a stronger impact in the early stage, but beyond certain point the inï¬‚uence gradually dies out and subsequent investors tend to follow the trend. In the presence of upward momentum, early buyers impose a negative externality on later buyers by increasing the incidence of large losses. A self-fulfilling reversal occurs once a correction factor is added to investors' valuation function.
Keywords: Information cascade; Price momentum; Price reversal; Private signal (search for similar items in EconPapers)
JEL-codes: G14 L10 L22 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2016:v:17:i:2:deng
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