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An information diffusion model for momentum effect based on investor wealth

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  • Yang, Haijun
  • Ge, Hengshun
  • Gao, Xinpeng

Abstract

We propose a private information diffusion model to explain the momentum, which considers different amounts of investor wealth and uses the proportion of informed investors’ wealth to measure information diffusion speed. Different distributions of investor wealth can lead to different information diffusion processes, and the speed of information diffusion is positively correlated with the concentration of investor wealth. Our empirical results reveal the relationship between momentum return and information diffusion speed by the S&P 500 stocks in two periods of the upmarket. The results show that stocks with faster information diffusion speed gain higher time-series momentum returns, especially under short holding period strategies. These results provide new evidence for the correlation between information diffusion and the momentum effect.

Suggested Citation

  • Yang, Haijun & Ge, Hengshun & Gao, Xinpeng, 2022. "An information diffusion model for momentum effect based on investor wealth," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001868
    DOI: 10.1016/j.najef.2021.101583
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    More about this item

    Keywords

    Information diffusion speed; Momentum effect; Wealth distribution of investors; Behavior finance; Informed investor;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General

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