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Investor Attention, Visual Price Pattern, and Momentum Investing

Last Updated on 10 February, 2024 by Rejaul Karim

Investor Attention, Visual Price Pattern, and Momentum Investing” is a research paper by Li-Wen Chen and Hsin-Yi Yu that explores the impact of visual price patterns on investor attention and its subsequent influence on momentum investing.

Given the intuitive nature of visual analysis compared to algebraic numbers, the authors posit that the visual pattern of historical prices serves as a salient signal capable of capturing attention and inducing overreaction.

By constructing a long-short portfolio consisting of stocks more likely to capture attention due to recognizable visual price patterns, the researchers achieve a remarkable annual risk-adjusted return of 23.1%, surpassing traditional momentum investing.

This outperformance persists across various specifications and asset pricing models, supporting the idea that momentum investing is influenced by psychological biases stemming from visual cues and limited attention.

Abstract Of Paper

As a visual mode of analysis is more intuitive to human cognition than algebraic numbers, we propose that the visual pattern of historical prices is a salient signal that attracts attention; thereby inducing overreaction. We construct a long-short portfolio, including the stocks that are more likely to grab attention, and create an illusion through their discernible visual patterns of historical prices. The newly-developed portfolio commands an annual risk-adjusted return of 23.1% and dominates momentum investing. The outperformance holds under various specifications and asset pricing models. We provide support that momentum is induced by visually psychological biases.

Original paper – Download PDF

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Author

Li-Wen Chen
National Chung Cheng University

Hsin-Yi Yu
National University of Kaohsiung

Conclusion

In conclusion, Li-Wen Chen and Hsin-Yi Yu’s research paper, “Investor Attention, Visual Price Pattern, and Momentum Investing,” sheds light on the influence of visual price patterns in attracting investor attention and inducing overreaction in momentum investing.

By developing a long-short portfolio that incorporates stocks with striking visual price patterns, the authors achieve an impressive annual risk-adjusted return of 23.1%, outperforming traditional momentum investing strategies. This superior performance remains consistent across different specifications and asset pricing models.

The study, therefore, provides compelling evidence that visually driven psychological biases play a critical role in shaping momentum investing outcomes, giving a new perspective on understanding the behavioral aspects involved in this widely-discussed investment strategy.

Related Reading:

Persistency of the Momentum Effect

A Critique of Momentum Anomalies

FAQ

What is the main focus of the research paper “Investor Attention, Visual Price Pattern, and Momentum Investing” by Li-Wen Chen and Hsin-Yi Yu?

The research paper focuses on exploring the impact of visual price patterns on investor attention and its subsequent influence on momentum investing. The authors propose that visually recognizable patterns of historical prices serve as salient signals that attract attention, leading to overreaction among investors.

How do the authors construct and analyze the long-short portfolio in the study, and what are the key findings regarding its performance?

The authors construct a long-short portfolio that includes stocks more likely to grab attention due to recognizable visual price patterns. The portfolio achieves an annual risk-adjusted return of 23.1%, surpassing traditional momentum investing. This outperformance holds under various specifications and asset pricing models.

What does the research suggest about the role of visual analysis and psychological biases in momentum investing?

The research suggests that visual analysis, being more intuitive to human cognition than algebraic numbers, plays a significant role in momentum investing. The visually recognizable patterns of historical prices act as salient signals, attracting attention and inducing overreaction among investors. The study provides support for the idea that momentum is influenced by visually driven psychological biases.

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