Introduction
Momentum is ubiquitous in financial markets — it is present across all time periods and markets. It’s a simple idea and it’s always there but “theoretically” it shouldn’t exist. A prominent researcher Eugene Fama refers to momentum as “the premier unexplained anomaly” in finance.
I have written several pieces on momentum, especially in crypto and stock markets. I trade a low-frequency momentum strategy on US stocks. Recently I started to trade a crypto momentum strategy in my Binance account. In this article I’ll explore momentum effect in crypto again. Though the basic idea is simple (buying the coins outperforming recently and shorting the losers), there are a lot of variables contributing to momentum in crypto and other markets. Specifically, we’ll analyze the role of information discreteness in and its conditional relationship with momentum.
Information discreteness
There’s an anecdote of boiling frog. If the frog is in a pan of boiling water, it will immediately jump out of the pan. On the other hand, if it is put in a pan with cold water that’s gradually getting warmed, it won’t react to slow changes and will stay there until its death.
We humans are not that different from this proverbial frog in our reaction to gradual changes. You’d think investors are smart people and they’ll be better in assessing news. I have to disappoint you. Investors…