Investor Attention, Visual Price Pattern, and Momentum Investing
74 Pages Posted: 13 Jul 2013 Last revised: 12 Aug 2014
Date Written: August 12, 2014
As a visual mode of analysis is more intuitive to human cognition than algebraic numbers, we propose that the visual pattern of historical prices is a salient signal that attracts attention; thereby inducing overreaction. We construct a long-short portfolio, including the stocks that are more likely to grab attention, and create an illusion through their discernible visual patterns of historical prices. The newly-developed portfolio commands an annual risk-adjusted return of 23.1% and dominates momentum investing. The outperformance holds under various specifications and asset pricing models. We provide support that momentum is induced by visually psychological biases.
Keywords: Momentum; Technical Analysis; Limited Attention; Visual; Illusion
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation