Defining Single Asset Price Momentum in terms of a Stochastic Process

Abstract

This paper looks at various definitions of momentum then investigates a particular definition of momentum via a statistical model where the asset price is assumed to follow a log Ornstein–Uhlenbeck process. Momentum is a term that is widely used to describe price behaviour but is not clearly defined in terms of statistical models. The results we derive show that asset price momentum is determined by price autocorrelation and that positive momentum, as commonly understood, would require explosive behaviour in log prices.

Share and Cite:

K. Hong and S. Satchell, "Defining Single Asset Price Momentum in terms of a Stochastic Process," Theoretical Economics Letters, Vol. 2 No. 3, 2012, pp. 274-277. doi: 10.4236/tel.2012.23050.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] W. Brock, J. Lakonishok and B. LeBaron, “Simple Technical Trading Rules and the Stochastic Properties of Stock Returns,” Journal of Finance, Vol. 47, No. 5, 1992, pp. 1731-1764. doi:10.1111/j.1540-6261.1992.tb04681.x
[2] N. Barberis, A. Shleifer and R. Vishny, “A Model of Investor Sentiment,” Journal of Financial Economics, Vol. 49, No. 3, 1998, pp. 307-343. doi:10.1016/S0304-405X(98)00027-0
[3] K. G. Rouwenhorst, “International Momentum Strategies,” Journal of Finance, Vol. 53, No. 1, 1998, pp. 267-284. doi:10.1111/0022-1082.95722
[4] D. Kent, D. Hirshleifer and A. Subrahmanyam, “Investor Psychology and Security Market Under- and Overreactions,” Journal of Finance, Vol. 53, No. 6, 1998, pp. 1839-1886. doi:10.1111/0022-1082.00077
[5] H. Hong, T. Lim and J. Stein, “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies,” Journal of Finance, Vol. 55, No. 1, 2000, pp. 265-295. doi:10.1111/0022-1082.00206
[6] N. Jegadeesh and S. Titman, “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations,” Journal of Finance, Vol. 56, No. 2, 2001, pp. 699-720. doi:10.1111/0022-1082.00342
[7] W. M. Fong and L. H. Yong, “Chasing Trends: Recursive Moving Average Trading Rules and Internet Stocks,” Journal of Empirical Finance, Vol. 12, No. 1, 2005, pp. 43-76. doi:10.1016/j.jempfin.2003.07.002
[8] J. Lewellen, “Momentum and Autocorrelation in Stock Returns,” Review of Financial Studies, Vol. 15, 2002, pp. 533-563. doi:10.1093/rfs/15.2.533
[9] J. S. Sagi and M. S. Seacholes, “Firm-Specific Attributes and the Cross-Section of Momentum,” Journal of Financial Economics, Vol. 84, No. 2, 2007, pp. 389-434. doi:10.1016/j.jfineco.2006.02.002
[10] T. J. Moskowitz, Y. H. Ooi and L. H. Pedersen, “Time Series Momentum,” Journal of Financial Economics, vol. 104, No. 2, 2012, pp. 228-250. doi:10.1016/j.jfineco.2011.11.003
[11] S. Achelis, “Technical Analysis from A to Z,” 2nd Edition, McGraw-Hill Companies, New York, 2000.
[12] J. D. Schwager, “The New Market Wizards: Conversation with America’s Top Traders,” HarperCollins, New York, 1992.
[13] A. Lo and J. Wang, “Implementing Option Pricing Models When Asset Returns Are Predictable,” Journal of Finance, Vol. 50, No. 1, 1995, pp. 87-129. doi:10.1111/j.1540-6261.1995.tb05168.x
[14] R. Kramer and M. Richter, “A Generalized Bivariate Ornstein-Uhlenbeck Model for Financial Assets,” Tagungsband zum Workshop “Stochastische Analysis”, Chemnitz, 2007.
[15] O. Onalan, “Financial Modelling with Ornstein-Uhlenbeck Processes Driven by Levy Process,” Proceedings of the World Congress on Engineering, London, Vol. 2, 1-3 July 2009.
[16] A. R. Bergstrom, “Continuous Time Econometrics Modelling,” Oxford University Press, Oxford, 1990
[17] A. Lo and A. C. MacKinlay, “When Are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, Vol. 3, No. 2, 1990, pp. 175-205. doi:10.1093/rfs/3.2.175
[18] K. J. Hong and S. Satchell, “The Sensitivity of Beta to the Time Horizon when Log Prices follow an Ornstein-Uhlenbeck Process,” European Journal of Finance, 2012, in Press. doi:10.1080/1351847X.2012.698992

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.