Allow me to finish this:
MOMENTUM: In finance, momentum is the empirically observed tendency for rising asset prices to rise further. 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 (Jegadeesh and Titman, 1993, 1999).
The existence of momentum is a market anomaly, which finance theory 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, is warranted only by changes in demand and supply or new information (cf. fundamental analysis). 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 (Daniel, Hirschleifer, and Subrahmanyam, 1998 and Barberis, Shleifer, and Vishny, 1998), 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, recent research has argued that momentum can be observed even with perfectly rational traders (Crombez, 2001).
EFFICIENT MARKET HYPOTHESIS: In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.
COGNITIVE BIAS (under Psychology) A cognitive bias is a pattern of deviation in judgment that occurs in particular situations. Implicit in the concept of a "pattern of deviation" is a standard of comparison; this may be the judgment of people outside those particular situations, or may be a set of independently verifiable facts.
SOO???
"In finance, momentum is the empirically observed tendency for rising asset prices to rise further. "
Big deal.....our bubble based economy based on printing and printing makes this happen without any difficulty.
The efficient Market Hypothesis is UNREALISTIC. Meant only to study in class so you understand. It is not meant to be taken seriously in the real world.
MARKETS ARE NOT EFFICIENT NOR ARE THEY INFORMATIONAL EFFICIENT.
About cognitive bias: well that is just outside my scope of knowledge. Good luck assessing human behavior.
MOMENTUM: In finance, momentum is the empirically observed tendency for rising asset prices to rise further. 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 (Jegadeesh and Titman, 1993, 1999).
The existence of momentum is a market anomaly, which finance theory 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, is warranted only by changes in demand and supply or new information (cf. fundamental analysis). 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 (Daniel, Hirschleifer, and Subrahmanyam, 1998 and Barberis, Shleifer, and Vishny, 1998), 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, recent research has argued that momentum can be observed even with perfectly rational traders (Crombez, 2001).
EFFICIENT MARKET HYPOTHESIS: In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information publicly available at the time the investment is made.
COGNITIVE BIAS (under Psychology) A cognitive bias is a pattern of deviation in judgment that occurs in particular situations. Implicit in the concept of a "pattern of deviation" is a standard of comparison; this may be the judgment of people outside those particular situations, or may be a set of independently verifiable facts.
SOO???
"In finance, momentum is the empirically observed tendency for rising asset prices to rise further. "
Big deal.....our bubble based economy based on printing and printing makes this happen without any difficulty.
The efficient Market Hypothesis is UNREALISTIC. Meant only to study in class so you understand. It is not meant to be taken seriously in the real world.
MARKETS ARE NOT EFFICIENT NOR ARE THEY INFORMATIONAL EFFICIENT.
About cognitive bias: well that is just outside my scope of knowledge. Good luck assessing human behavior.
confused: <- that's me scratching my head trying to figure out what your problem is)