The Making of Momentum: A Demand-System Perspective

75 Pages Posted: 4 Apr 2023 Last revised: 11 Jan 2024

See all articles by Paul Huebner

Paul Huebner

Stockholm School of Economics

Date Written: March 21, 2023


I develop a framework to quantify which features of investors’ dynamic trading strategies lead to momentum in equilibrium. I distinguish persistent demand shocks, capturing underreaction, and the term structure of demand elasticities, representing arbitrage intensities decreasing with investor horizon. I introduce both channels into an asset demand system that I estimate from institutional investors’ portfolio holdings and prices. Investors respond more to short-term than longer-term price changes: the term structure of elasticities is downward-sloping, creating momentum, whereas demand shocks mean-revert, contributing toward reversal. Stocks with more investors with downward-sloping term structures exhibit stronger momentum returns by 7% per year.

Keywords: Portfolio choice, Momentum, Demand system, Institutional investors, Portfolio choice

JEL Classification: G1, G2, L1

Suggested Citation

Huebner, Paul, The Making of Momentum: A Demand-System Perspective (March 21, 2023). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Available at SSRN: or

Paul Huebner (Contact Author)

Stockholm School of Economics ( email )


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