Buy-Side Competition and Momentum Profits
61 Pages Posted: 1 Mar 2018 Last revised: 18 May 2018
Date Written: March 12, 2018
We develop a measure of buy-side competition for momentum investing and show that it explains momentum profits. The monthly momentum spread is 139 basis points when competition is low and is negligible when competition is high. These results are stronger in more investible and lower transaction cost strategies such as value-weighted portfolios and larger capitalization stocks. Better alphas are attained with less negative skewness and better Sharpe and Sortino ratios. Several stock characteristics traditionally related to momentum profits do not explain our results.
Keywords: Momentum, Competition, Mutual Funds, Market Efficiency, Return Predictability
JEL Classification: G10, G11, G12, G14
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