TITLE:
A Functional Modeling Approach to Stock Market Momentum
AUTHORS:
Qian Wei, Xiang Gao, Zhan Wang
KEYWORDS:
Momentum, Econophysics, Intrinsic Price, Return Prediction
JOURNAL NAME:
Theoretical Economics Letters,
Vol.11 No.5,
September
6,
2021
ABSTRACT: This paper proposes a novel dynamic function to
capture the phenomenon of momentum in financial markets. It occurs when high
returns subsequently follow a security’s past high returns, and subsequent low
returns follow its past low returns. By exploring an analogy to the momentum
definition from physics, we model financial momentum as the product of a stock’s
return and its number of shares outstanding with considerations of the
difference between its market price and intrinsic price. In contrast to
traditional proxies, where the momentum is described as the rate of
acceleration of a security’s price or volume and is calculated based on past
12-month returns or the associated accumulation in returns, the dynamics of our
model exhibit advantageous trading characteristics for common momentum-based
strategies.