In
finance, momentum is the empirically observed tendency for rising asset prices or securities return to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average excess return of about 1% per month. Momentum signals (e.g., 52-week high) have been shown to be used by financial analysts in their buy and sell recommendations.
The existence of momentum is a
market anomaly, which
finance theory
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
struggles to explain. The difficulty is that an increase in asset prices, in and of itself, should not warrant further increase. Such increase, according to the
efficient-market hypothesis
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
, is warranted only by changes in demand and supply or new information (cf.
fundamental analysis
Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...
). Students of financial economics have largely attributed the appearance of momentum to
cognitive biases, which belong in the realm of
behavioral economics. The explanation is that investors are irrational, in that they underreact to new information by failing to incorporate news in their transaction prices. However, much as in the case of
price bubbles, other research has argued that momentum can be observed even with perfectly rational traders.
See also
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Carhart four-factor model
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Momentum investing Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.
While momentum investing is well-established as ...
*
Technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
External links
The Definitive Guide To Momentum Investing and TradingSignal Plot
References
Financial markets
Behavioral finance
Technical analysis
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ru:Моментум (технический анализ)