Time Series Momentum and Market Stability

Xuezhong (Tony) He and Kai Li

No 341, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We propose a continuous-time heterogeneous agent model consisting of fundamental, momentum, and contrarian traders to explain the significant time series momentum. We show that the market under-reacts in short-run and overreacts in long-run when momentum traders dominate the market, which provides profit opportunity for time series momentum strategies with short-time horizons and reversal with long-time horizons. We find momentum strategies with short horizons stabilise the market while the effect becomes opposite with longer horizons. The results provide an insight into the profitability of time series momentum documented in recent empirical studies.

Keywords: Time series momentum; profitability; market stability; stochastic delay differential equations (search for similar items in EconPapers)
JEL-codes: C62 D53 D84 G12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-02-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (5)

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