Can fat-tail create the momentum and reversal?

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We suggest that fat-tail variations can cause both short-term momentum and long-term reversal simultaneously, in both the time series and cross-sectional returns of securities. The fat-tail of the distribution is known to explain many anomalies in the financial market, but not momentum. To support our argument, we adopt widely accepted models in the literature, which generate reversal only, and revise a single assumption: Each random variable follows a non-normal stable distribution rather than a normal distribution. This single difference generates additional short-term return momentum. This finding shows that 1) investor irrationality is not essential to generate both phenomena, and 2) we must be cautious not to overuse normal distributions in the models.
Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
Issue Date
2020-09
Language
English
Article Type
Article
Citation

APPLIED ECONOMICS, v.52, no.44, pp.4850 - 4863

ISSN
0003-6846
DOI
10.1080/00036846.2020.1746481
URI
http://hdl.handle.net/10203/279546
Appears in Collection
MT-Journal Papers(저널논문)
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