Wikia

Psychology Wiki

Changes: Momentum investing

Edit

Back to page

m (Reverted edits by 50.129.30.206 (talk | block) to last version by Mostly Zen)
 
Line 1: Line 1:
 
{{SocialPsy}}
 
{{SocialPsy}}
  +
{{PsyPerspective}}
 
'''Momentum investing''' is buying [[stock]]s or other [[equity|equities]] that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. It has been reported that this strategy [[yield]]s average returns of 1% per month for the following 3-12 months (Jegadeesh and Titman).
 
'''Momentum investing''' is buying [[stock]]s or other [[equity|equities]] that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. It has been reported that this strategy [[yield]]s average returns of 1% per month for the following 3-12 months (Jegadeesh and Titman).
   
Line 6: Line 7:
 
Seasonal effects may help to explain some of the reason for success in the momentum investing strategy. If a stock has performed poorly for months leading up to the end of the year, investors may decide to sell their holdings for tax purposes. Increased supply of shares in the market drive its price down, causing others to sell. Once the reason for tax selling is eliminated, the stock's price tends to recover.
 
Seasonal effects may help to explain some of the reason for success in the momentum investing strategy. If a stock has performed poorly for months leading up to the end of the year, investors may decide to sell their holdings for tax purposes. Increased supply of shares in the market drive its price down, causing others to sell. Once the reason for tax selling is eliminated, the stock's price tends to recover.
   
Other sophisticated investors may react to inefficient pricing of a stock caused by momentum investing using the tool of [[arbitrage]].
 
   
It is believed that [[George Soros]] (1987) used a variation of momentum investing by bidding the price up of already overvalued equities in the market for conglomorates in the 1960's and [[Real Estate Investment Trusts]] in the 1970's. This strategy is termed [[positive feedback investing]].
 
 
[[Richard Driehaus]], the founder of [[Driehaus Capital Management, Inc.]], is widely considered the father of momentum investing. This [[Chicago]] [[money manager]] takes exception with the old stock market adage of buying low and selling high. According to him, "far more money is made buying high and selling at even higher prices."
 
   
 
==References==
 
==References==

Latest revision as of 00:48, February 21, 2012

Assessment | Biopsychology | Comparative | Cognitive | Developmental | Language | Individual differences | Personality | Philosophy | Social |
Methods | Statistics | Clinical | Educational | Industrial | Professional items | World psychology |

Social psychology: Altruism · Attribution · Attitudes · Conformity · Discrimination · Groups · Interpersonal relations · Obedience · Prejudice · Norms · Perception · Index · Outline


This article needs rewriting to enhance its relevance to psychologists..
Please help to improve this page yourself if you can..


Momentum investing is buying stocks or other equities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. It has been reported that this strategy yields average returns of 1% per month for the following 3-12 months (Jegadeesh and Titman).

While consensus exists about the validity of this claim, economists have trouble reconciling this phenomenon using efficient market theory. Two main hypotheses have been submitted to explain the effect in terms of an efficient market. In the first, it is assumed that momentum investors bear significant risk for assuming this strategy, and thus the high returns are compensation for the risk. The second theory assumes that momentum investors are exploiting behavioral shortcomings in other investors, such as investor herding, investor over and underreaction, and belief perserverance.

Seasonal effects may help to explain some of the reason for success in the momentum investing strategy. If a stock has performed poorly for months leading up to the end of the year, investors may decide to sell their holdings for tax purposes. Increased supply of shares in the market drive its price down, causing others to sell. Once the reason for tax selling is eliminated, the stock's price tends to recover.


ReferencesEdit

  • Jegadeesh, Narasimhan and Titman, Sheridan, 1993, Returns to buying winners and selling losers: Implications for stock market efficiency, Journal of Finance 48, 65-91.
  • Schwager, Jack D., 1992, The New Market Wizards: Conversations With America's Top Traders, John Wiley & Sons, Inc., NY, p. 224, ISBN 0-471-13236-5.
  • Soros, George, 1987, The Alchemy of Finance, Simon and Shuster, New York.
  • Tanous, Peter J., 1997, Investment Gurus, New York Institute of Finance, NJ, ISBN 0-7352-0069-6.
This page uses Creative Commons Licensed content from Wikipedia (view authors).

Around Wikia's network

Random Wiki