Momentum Mechanisms under Heterogeneous Beliefs

Abstract

We establish a continuous-time heterogeneous beliefs model to discuss the mechanisms of Momentum and Reversal. Price learning, information transmission and extrapolative expectation are incorporated into a unified framework for the Momentum and Reversal. The calibration results from SP500 show that the presence of Extrapolators and Information-driven Traders are important influences of Momentum and Reversal in all phases. We also found that there is a dramatic strengthening of Momentum and Reversal with the change of belief weight near the true belief weight.

Keywords: Heterogeneous Beliefs, Extrapolators, Information Transmission, Momentum.

JEL Classification: G12, G14.