Momentum in prices is based on momentum in information


What causes price momentum? You can define prices moving over a time period in different ways, but price momentum is the manifestation that that there is a change in the equilibrium price, or a change in supply and demand for a market. The reason for this change is the receiving of new information that will change the price. If there is no new information, there will not be a change in price. Hence, the process of how information enters the markets will define how price should  move. 

If there is a discrete increase in information, there will be a discrete jump in prices. If there is a continuous increase or disclosure of information, there will be a continuous movement in price. This is consistent with rational expectations and market efficiency. If there is one surprise, there will be one jump in price. If there are a series of surprises in one direction, there will be a trend in price. 

Recent research has discussed and analyzed this issue in the context of the "frog-in-the-pan" hypothesis. If there is a continuous release of small amounts of information, there will be an inattentiveness to this news and a gradual increase in prices. This slow release of information will lead to price momentum. There is a link between the continuous versus discrete information and momentum.

The researchers do not look at information directly but focus on the movement of price relative to the amount of up versus down days. (Sounds like a more sophisticated technical analysis approach, but we will not go down that path.) They focus on a behavioral finance explanation when I think there is a simpler story. Nevertheless, an alternative story not based on behavior has to explain why there would be continuous information flow surprises in one direction. 

This research story suggests that continuous information releases will lead to momentum. This makes sense especially for global macro investing and commodity investing because there may be more continuous information releases in macro markets. In the case of bonds, there are regular monthly government release of data that may drip new information to investors on the economy. Any one piece of information may not tell us enough about the economy to have a jump to a new equilibrium price. There may be big surprises, but it is more likely that the cumulative release of information is what affects prices. This would suggest that the regular release of information will likely lead to momentum in prices. Momentum may do better in macro markets than individual stock markets.