Open AccessMomentum: An Economic View
Author(s) -
Wilhelm Berghorn,
Sascha Otto
Publication year - 2017
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v8n3p142
Subject(s) - leverage (statistics) , momentum (technical analysis) , fractal , economics , asset (computer security) , efficient market hypothesis , rational expectations , mandelbrot set , stock (firearms) , financial economics , stock market , capital asset pricing model , financial market , econometrics , mathematical economics , computer science , mathematics , finance , engineering , artificial intelligence , mechanical engineering , mathematical analysis , paleontology , computer security , horse , biology
Momentum strategies have widely been recognized in the literature for several markets, asset classes and time horizons. However, these strategies face a major objection as they significantly violate even the weak form of the efficient market hypothesis. Recently, it has been shown that, from a mathematical perspective, the inner dynamics of asset prices are better described by the Mandelbrot Market Model. This model uses fractal trends observed in real stock data, and the mathematical characteristics measured and used in the model show that trends in this fractal setup explain momentum. A central question attached to this mathematical analysis is why these long trends exist, economically. Although it has been documented well in the literature that investors are not rational and are prone to several biases, we show in this work by example that momentum strategies leverage fundamental, company-specific improvements of the business condition, capturing the value generation process. Consequently, this work supports the mathematical claims made previously: There are no efficient markets as investors constantly fail to anticipate available information.