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Buy-Side Competition and Momentum Profits

Author

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  • Gerard Hoberg
  • Nitin Kumar
  • Nagpurnanand Prabhala

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, with 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.

Suggested Citation

  • Gerard Hoberg & Nitin Kumar & Nagpurnanand Prabhala, 2022. "Buy-Side Competition and Momentum Profits," The Review of Financial Studies, Society for Financial Studies, vol. 35(1), pages 254-298.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:1:p:254-298.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab016
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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