Momentum and Reversals: An Alternative Explanation by Non-Conserved Quantities

Dominik Appel, Katrin Dziergwa and Michael Grabinski

International Journal of Finance, Insurance and Risk Management, 2012, vol. 2, issue 1, 8

Abstract: The momentum effect in stock trading means that stocks performing well in the past will do so in the future, too. A recent (seemingly) proof of it would be a big discovery: Stock prices would obey laws similar to the Newtonian equation of motion. However, using the recent result that stock prices are distinct from stock values, the whole mystery disappears without a trace. Stock prices fluctuate chaotically (in a mathematical sense). Therefore the momentum within stock prices is easily explained by a self-fulfilling prophecy as long as enough people believe in it. In the recent experimental "proof" of the momentum effect, stocks had been traded thousands of times. In generalizing the well-known average cost effect, we give a second quantitative explanation for the observed results.

Keywords: Momentum, chaos; intrinsic value; conserved quantity; average cost method. (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:ers:ijfirm:v:2:y:2012:i:1:p:8

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