Abstract
This paper suggests a new model that attempts to explain long-term reversal and short-term momentum in stock prices by the interaction of momentum traders and passive rational investors. The new model is distinct from other overreaction models in that price momentum becomes stronger as a trend in stock price changes continues. The simulation results for the model confirm long-term reversal and short-term momentum and propose three new predictions that distinguish the model from other hypotheses. These predictions are synthetically described as the long-term momentum hypothesis. The primary empirical results provided by this study are consistent with the long-term momentum hypothesis.
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