Buy-Side Competition and Momentum Profits
85 Pages Posted: 1 Mar 2018 Last revised: 15 Jul 2019
Date Written: July 04, 2019
We show that a new measure of buy-side competition explains momentum profits. The monthly momentum spread is 1.39% when competition is low and negligible when competition is high. Better alphas are attained with superior Sharpe and Sortino ratios, less 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. Evidence on long-term returns and the trading patterns of funds, their style peers, distant funds, and retail investors suggest that slow information diffusion and trend chasing explain momentum and its reversal in low competition markets.
Keywords: Momentum, Competition, Mutual Funds, Market Efficiency, Return Predictability
JEL Classification: G10, G11, G12, G14
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