Explaining momentum profits with an epidemic diffusion model

Nauzer Balsara, Lin Zheng, Andrea Vidozzi and Luca Vidozzi

Journal of Economics and Finance, 2006, vol. 30, issue 3, 407-422

Abstract: We show that information diffusion is a function of its dissemination and assimilation. Whereas dissemniation is a function of observable factors such as volume and price volatility, assimilation is dependent on unobservable factors such as the usefulness and reliability of information. We find that buying low volume (or low volatility) past losers and shortselling low volume (or low volatility) past winners generates a positive net return across the entire sample period and especially during bear markets. Second, buying high volatility past winners and shortselling high volatility past losers generates a positive net return, especially during bear markets. Copyright Academy of Economics and Finance 2006

Date: 2006
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DOI: 10.1007/BF02752744

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