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Comomentum: inferring arbitrage activity from return correlations

Lou, Dong ORCID: 0000-0002-5623-4338 and Polk, Christopher (2021) Comomentum: inferring arbitrage activity from return correlations. Review of Financial Studies. ISSN 0893-9454 (In Press)

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Abstract

We propose a novel measure of arbitrage activity to examine whether arbitrageurs can have a destabilizing effect in the stock market. We focus on stock price momentum, a classic example of a positive-feedback strategy that our theory predicts can be destabilizing. Our measure, dubbed comomentum, is the high-frequency abnormal return correlation among stocks on which a typical momentum strategy would speculate. When comomentum is low, momentum strategies are stabilizing, reflecting an underreaction phenomenon that arbitrageurs correct. When comomentum is high, the returns on momentum stocks strongly revert, reflecting prior overreaction from crowded momentum trading which pushes prices away from fundamentals.

Item Type: Article
Official URL: https://academic.oup.com/rfs
Additional Information: © 2021 Oxford University Press
Divisions: Finance
Subjects: H Social Sciences > HG Finance
H Social Sciences > HC Economic History and Conditions
Date Deposited: 26 Mar 2021 10:21
Last Modified: 11 Sep 2021 23:16
URI: http://eprints.lse.ac.uk/id/eprint/109318

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