Buy-Side Competition and Momentum Profits

117 Pages Posted: 1 Mar 2018 Last revised: 2 Dec 2020

See all articles by Gerard Hoberg

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Nitin Kumar

Indian School of Business (ISB), Hyderabad

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Date Written: November 23, 2020

Abstract

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

Suggested Citation

Hoberg, Gerard and Kumar, Nitin and Prabhala, Nagpurnanand, Buy-Side Competition and Momentum Profits (November 23, 2020). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3132378 or http://dx.doi.org/10.2139/ssrn.3132378

Gerard Hoberg

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://www-bcf.usc.edu/~hoberg/

Nitin Kumar (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

India

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

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