Private Information Transmission, Momentum and Reversal

We propose a simple model of information transmission and price dynamics to investigate that private information can contribute to both momentum and reversal. The prior literature only suggests that public information can correct the bias of price and cause a reversal. In a word-of-mouth transmission process, the heterogeneity of investors depends on the private information that they have. We incorporate self-updating private information into our model and find that price increases at first and then decreases under certain conditions. This paper provides a unified explanation for momentum and reversal in the view of private information. Moreover, our empirical results verify our theoretical conclusions.