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Cambridge Finance

 

Avanidhar (Subra) Subrahmanyam (UCLA Anderson School of Management) 

 

Title: Momentum and Short-Term Reversals: Theory and Evidence 

Abstract: How might short-term reversals and longer-term momentum coexist within markets? To address this question, we develop a dynamic model with liquidity demands and informationprocessing constraints. Specifically, we consider noise traders, and investors who underestimate the quality of information they do not themselves produce. Markets transition from reversals to momentum as lag horizons lengthen. Reversals weaken following earnings announcements. Skipping a month between formation and holding periods increases momentum profits. Larger order flows from retail traders imply stronger reversals. These predictions are supported empirically. If noise demands are positively autocorrelated, price buildups and collapses occur as in recent “meme” stock episodes.

Date: 
Thursday, 27 October, 2022 - 13:00
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