Rational and Behavioral Causes of the Emergence and Enhancement of the Momentum Effect

Marcin Fuksiewicz

doi:10.5604/01.3001.0015.9361

Published : 2021-12-30

Vol. 95 No. 4 (2021)

Rational and Behavioral Causes of the Emergence and Enhancement of the Momentum Effect

Marcin Fuksiewicz

DOI: https://doi.org/10.5604/01.3001.0015.9361

Abstract

The efficient market hypothesis (EMH) is widely recognized as true not only in capital markets but also in currency and real estate markets. Despite continuing evidence confirming the hypothesis, there are cyclical anomalies that violate its assumptions. The most important of these anomalies is the correlation of past and future rates of return (from 1 to 12 months), also known as the momentum effect. The significance of this anomaly lies in its widespread occurrence in various markets and the fact it can be used to build investment strategies. Consequently, it is extremely important to know what causes the anomaly and what factors can strengthen or weaken it. The aim of this article is to present two groups of causes of the momentum effect. The first group of causes is based on rational reasoning. The second one includes behavioral factors, connected with actual, often irrational behaviours of investors, and, more generally, capital markets.(original abstract)

Keywords:

Momentum strategies, Behavioural finance, Financial markets, Capital market

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Fuksiewicz, M. (2021). Rational and Behavioral Causes of the Emergence and Enhancement of the Momentum Effect. Zeszyty Naukowe Wyższej Szkoły Bankowej W Poznaniu, 95(4). https://doi.org/10.5604/01.3001.0015.9361

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