Momentum Investing Across Economic States: Evidence of Market Inefficiency in Good Times

Efficient Market Hypothesis
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Efficient Market Hypothesis
Market efficiency is both important to the producers and the consumers in the market. Moreover, efficiency ensures that there is constant flow of goods in the market and therefore economies are also expected to be on the rise when the market is efficient. However, efficiency in the market is at times considered to vary across different times due to the asymmetric information that may prevail in the market. Asymmetry of information refers to the different kinds of information that individuals may be having in a market. In this case, investors may tend to be overconfident in times of boom or good times and on the other hand they may be rationale and cautious during times of risks in the market (52).
The market inefficiency is also portrayed well in the momentum investing. In this regard, investors tend to experience different results during the year from the momentum investments. This is whereby, for example, an investor may record high returns during the month of January while on the other hand when December comes the investor will experience negative results. This is due to asymmetry in the market that is as a result of changes in the time series at the different periods of the year (53). This may also be different in other times when the previous losers may regain at the beginning of the year and therefore leads to negative momentum returns during the month of January. However, it is explained in the article that the high performance associated with momentum cannot be explained in good times (54).
Financial statements are very important in particular to the investors as it provides relevant and imperative information regarding their investments in the economy. Therefore, financial statements are used in order to guide the investor where to put more money and where to go slow on investments as well. It is therefore important to ensure that the financial statements are performed in the best way in order to ensure that investors gain from the same analyses.