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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

Abstract: 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 influence 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)
Date: 2016
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