Momentum, Reversal, and the Trading Behaviors of Institutions
52 Pages Posted: 31 Dec 2004
Date Written: July 12, 2006
We identify two types of momenta in stock returns - one due to total returns and one due to firm-specific residual returns. Despite similar performances over the first year, these momentum portfolios perform dramatically differently beyond year one. Total-return momentum reverses strongly; residual momentum continues for years. This complexity in return momentum challenges the current theories of momentum. We propose that both momenta are consequences of agency issues in the money management industry and provide empirical support for this economic rationale of momentum in returns. Incentives induce institutions to chase total returns and to underreact to firm-specific news.
Keywords: Momentum, underreaction, overreaction, institutions, agency costs
JEL Classification: G12, G20, G14
Suggested Citation: Suggested Citation