How Does the Speed of Capital Flows Affect Factor Momentum, Reversal and Volatility?

85 Pages Posted: 1 Oct 2020 Last revised: 19 Apr 2021

See all articles by Xi Dong

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Namho Kang

Bentley University - Department of Finance

Joel Peress

INSEAD - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 16, 2021

Abstract

We document that hedge-fund and mutual-fund flows drive much of anomaly-return dynamics by, respectively, correcting and amplifying anomalies, and doing so slowly. Indeed, their contributions to the autocorrelation and volatility of anomaly returns add up to 57% over horizons longer than one year, vs. a few percent over shorter horizons. Thus, flows cause long-horizon factor momentum and stock excess volatility, not transient fluctuations. This effect is more pronounced for hedge funds, helmed by fund managers rather than fund investors, and linked to frictions. We address endogeneity concerns and propose a model highlighting the horizon-dependent effects of capital on anomaly-return dynamics.

Keywords: pricing anomalies; market efficiency; return autocorrelation; factor momentum; excess volatility; mutual funds; hedge funds; slow-moving capital; frictions; limits to arbitrage; spectral analysis.

JEL Classification: G12, G14, G23

Suggested Citation

Dong, Xi and Kang, Namho and Peress, Joel, How Does the Speed of Capital Flows Affect Factor Momentum, Reversal and Volatility? (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3675163 or http://dx.doi.org/10.2139/ssrn.3675163

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://faculty.baruch.cuny.edu/xdong1/

Namho Kang (Contact Author)

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Joel Peress

INSEAD - Finance ( email )

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F-77305 Fontainebleau Cedex
France
+33 1 60 72 40 00 (Phone)
+33 1 60 72 40 45 (Fax)

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