Hands-On Machine Learning for Algorithmic Trading

Rationale

Reasons for the momentum effect point to investor behavior, persistent supply, and demand imbalances, a positive feedback loop between risk assets and the economy, or the market microstructure.

The behavioral reasons reflect biases of under-reaction and over-reaction to market news as investors process new information at different speeds. After an initial under-reaction to news, investors often extrapolate past behavior and create price momentum. The technology stocks rally during the late 90s market bubble was an extreme example. A fear and greed psychology also motivates investors to increase exposure to winning assets and continue selling losing assets.

Momentum can also have fundamental drivers such as a positive feedback loop ...