Momentum Effect

Momentum Effect is the tendency of investments to persist in their performance. Investments that have done well will continue to do well, while those that have done poorly will continue to do poorly. Trend following is a form of momentum investing.

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Behavioral finance explains the momentum effect as a market anomaly. Momentum effect is due to the following behavioral biases of financial markets:

  1. Anchoring and under reaction
  2. Confirmation Bias
  3. Herding and Feedback Trading
  4. Conservatism and Representativeness
  5. Overconfidence and self-attribution
  6. Slow Diffusion of information
  7. Disposition effect