Professional Portfolio Managers - a Setting for Momentum Strategies
19 Pages Posted: 7 Feb 2007 Last revised: 30 Jul 2008
Date Written: July 28, 2008
Most real world market participants are professional portfolio managers (PPM), which means that they are not managing their own money, but rather managing money for other people (e.g. mutual funds, pension funds). This situation generates an agency feature which has relevant consequences, as investors lacking specialized knowledge may evaluate the PPM just based on his past performance (Performance Based Evaluation - PBE). The objective of this paper is to extend the analysis of the PPM's context inferring the effectiveness of feedback trading in this setting and so describing a source of market's inefficiency. In this sense, we propose a model which considers that professional investment is conducted by a relatively small number of highly specialized PPM using other people's capital. In a deductive way, we reach four propositions which justify the effectiveness of momentum strategies.
Keywords: Momentum, Agency Theory, Prospect Theory
JEL Classification: G12
Suggested Citation: Suggested Citation