Buy-Side Competition and Momentum Profits
117 Pages Posted: 1 Mar 2018 Last revised: 2 Dec 2020
Date Written: November 23, 2020
We show that a new measure of buy-side competition explains momentum profits. The momentum quintile spread is 1.11% when competition is low and negligible when competition is high. Better alphas are attained with superior Sharpe and Sortino ratios, no negative skewness and in more investible strategies featuring value-weighted portfolios and large capitalization stocks. Stock characteristics traditionally related to momentum do not explain our results. Tests based on long-term reversals, the trading patterns of funds, their style peers, distant funds, and retail investors suggest that slow information diffusion explains the large momentum spreads and momentum reversals in low competition markets.
Keywords: Momentum, Competition, Mutual Funds, Market Efficiency, Return Predictability
JEL Classification: G10, G11, G12, G14
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