Annals of Finance

, Volume 15, Issue 4, pp 455–487 | Cite as

Momentum and reversal in financial markets with persistent heterogeneity

  • Giulio Bottazzi
  • Pietro DindoEmail author
  • Daniele Giachini
Research Article


This paper investigates whether short-term momentum and long-term reversal may emerge from the wealth reallocation process taking place in speculative markets. We assume that there are two classes of investors who trade long-lived assets by holding constantly rebalanced portfolios based on their beliefs. Provided beliefs, and thus portfolios, are sufficiently diversified, all investors survive in the long-run and, due to waves of mispricing, the resulting equilibrium returns exhibit long-term reversal. If, moreover, asset dividends are positively correlated, investors’ profitable trades become positively correlated too, thus generating short-term momentum in equilibrium returns. We use the model to replicate the performance of the Winners and Losers portfolios highlighted by the empirical literature and to provide insights on how to improve upon them. Finally, we show that dividend positive autocorrelation is positively related to momentum and negatively related to reversal while diversity of beliefs is positively related to both momentum and reversal.


Market efficiency Heterogeneous beliefs Speculation Short-term momentum Long-term reversal Evolutionary finance 

JEL Classification

G60 D53 G02 G12 G14 



The funding was provided by Horizon 2020 Framework Programme (Grant No. 640772 - DOLFINS) and FP7 People: Marie-Curie Actions (Grant No. PIOF-GA-2011-300637).


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Dipartimento EMbeDS, Istituto di EconomiaScuola Superiore Sant’AnnaPisaItaly
  2. 2.Dipartimento di EconomiaUniversità Ca’ Foscari VeneziaVeneziaItaly

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