Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model
Abstract Although momentum strategies result in abnormal profitability, thereby challenging the efficient market hypothesis (EMH), concerns persist regarding their reliability due to their significant volatility and susceptibility to substantial losses. In this study, we investigate the limitations...
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SpringerOpen
2025-01-01
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| Series: | Financial Innovation |
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| Online Access: | https://doi.org/10.1186/s40854-024-00743-y |
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| author | Qingyuan Han |
| author_facet | Qingyuan Han |
| author_sort | Qingyuan Han |
| collection | DOAJ |
| description | Abstract Although momentum strategies result in abnormal profitability, thereby challenging the efficient market hypothesis (EMH), concerns persist regarding their reliability due to their significant volatility and susceptibility to substantial losses. In this study, we investigate the limitations of these strategies and propose a solution. Our literature review reveals that the volatile profits are due to statistical analyses that assume the persistence of past patterns, leading to unreliable results in out-of-sample scenarios when underlying mechanisms evolve. Statistical analysis, the predominant method in financial economics, often proves inadequate in explaining market fluctuations and predicting crashes. To overcome these limitations, a paradigm shift towards dynamic approaches is essential. Drawing inspiration from three groundbreaking economists, we introduce the extended Samuelson model (ESM), a dynamic model that connects price changes to market participant actions. This paradigm transition uncovers several significant findings. First, timely signals indicate momentum initiations, cessations, and reversals, validated using S&P 500 data from 1999 to 2023. Second, ESM predicts the 1987 Black Monday crash weeks in advance, offering a new perspective on its underlying cause. Third, we classify sequential stock price data into eight distinct market states, including their thresholds for transitions, laying the groundwork for market trend predictions and risk assessments. Fourth, the ESM is shown to be a compelling alternative to EMH, offering potent explanatory and predictive power based on a single, realistic assumption. Our findings suggest that ESM has the potential to provide policymakers with proactive tools, enabling financial institutions to enhance their risk assessment and management strategies. |
| format | Article |
| id | doaj-art-fbf43b409d774453a77c262e585a3399 |
| institution | Kabale University |
| issn | 2199-4730 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj-art-fbf43b409d774453a77c262e585a33992025-01-19T12:36:09ZengSpringerOpenFinancial Innovation2199-47302025-01-0111113710.1186/s40854-024-00743-yUnderstanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson modelQingyuan Han0Department of Atmospheric and Earth Sciences, University of Alabama in HuntsvilleAbstract Although momentum strategies result in abnormal profitability, thereby challenging the efficient market hypothesis (EMH), concerns persist regarding their reliability due to their significant volatility and susceptibility to substantial losses. In this study, we investigate the limitations of these strategies and propose a solution. Our literature review reveals that the volatile profits are due to statistical analyses that assume the persistence of past patterns, leading to unreliable results in out-of-sample scenarios when underlying mechanisms evolve. Statistical analysis, the predominant method in financial economics, often proves inadequate in explaining market fluctuations and predicting crashes. To overcome these limitations, a paradigm shift towards dynamic approaches is essential. Drawing inspiration from three groundbreaking economists, we introduce the extended Samuelson model (ESM), a dynamic model that connects price changes to market participant actions. This paradigm transition uncovers several significant findings. First, timely signals indicate momentum initiations, cessations, and reversals, validated using S&P 500 data from 1999 to 2023. Second, ESM predicts the 1987 Black Monday crash weeks in advance, offering a new perspective on its underlying cause. Third, we classify sequential stock price data into eight distinct market states, including their thresholds for transitions, laying the groundwork for market trend predictions and risk assessments. Fourth, the ESM is shown to be a compelling alternative to EMH, offering potent explanatory and predictive power based on a single, realistic assumption. Our findings suggest that ESM has the potential to provide policymakers with proactive tools, enabling financial institutions to enhance their risk assessment and management strategies.https://doi.org/10.1186/s40854-024-00743-yMomentum strategyInvestor behaviorEfficient market hypothesisBehavior finance theoryExcess demandMarket crisis |
| spellingShingle | Qingyuan Han Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model Financial Innovation Momentum strategy Investor behavior Efficient market hypothesis Behavior finance theory Excess demand Market crisis |
| title | Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model |
| title_full | Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model |
| title_fullStr | Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model |
| title_full_unstemmed | Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model |
| title_short | Understanding price momentum, market fluctuations, and crashes: insights from the extended Samuelson model |
| title_sort | understanding price momentum market fluctuations and crashes insights from the extended samuelson model |
| topic | Momentum strategy Investor behavior Efficient market hypothesis Behavior finance theory Excess demand Market crisis |
| url | https://doi.org/10.1186/s40854-024-00743-y |
| work_keys_str_mv | AT qingyuanhan understandingpricemomentummarketfluctuationsandcrashesinsightsfromtheextendedsamuelsonmodel |