Time Series Momentum and Market Stability

44 Pages Posted: 6 Mar 2014

See all articles by Xuezhong He

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Date Written: February 18, 2014

Abstract

We propose a continuous-time heterogeneous agent model consisting of fundamental, momentum, and contrarian traders to explain the significant time series momentum. We show that the market under-reacts in short-run and over-reacts in long-run when momentum traders dominate the market, which provides profit opportunity for time series momentum strategies with short-time horizons and reversal with long-time horizons. We find momentum strategies with short horizons stabilise the market while the effect becomes opposite with longer horizons. The results provide an insight into the profitability of time series momentum documented in recent empirical studies.

Keywords: Time series momentum, profitability, market stability, stochastic delay differential equations

JEL Classification: C62, D53, D84, G12

Suggested Citation

He, Xue-Zhong 'Tony' and Li, Kai, Time Series Momentum and Market Stability (February 18, 2014). Available at SSRN: https://ssrn.com/abstract=2400847 or http://dx.doi.org/10.2139/ssrn.2400847

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

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