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An institutional theory of momentum and reversal

Vayanos, Dimitri and Woolley, Paul (2013) An institutional theory of momentum and reversal. Review of Financial Studies, 26 (5). pp. 1087-1145. ISSN 0893-9454

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Abstract

We propose a theory of momentum and reversal based on flows between investment funds. Flows are triggered by changes in fund managers' efficiency, which investors either observe directly or infer from past performance. Momentum arises if flows exhibit inertia, and because rational prices underreact to expected future flows. Reversal arises because flows push prices away from fundamental values. Besides momentum and reversal, flows generate comovement, lead-lag effects, and amplification, with these being larger for high idiosyncratic risk assets. A calibration of our model using evidence on mutual fund returns and flows generates sizeable Sharpe ratios for momentum and value strategies.

Item Type: Article
Official URL: http://www.wiley.com/bw/journal.asp?ref=0012-9682
Additional Information: © 2013 The Authors
Library of Congress subject classification: H Social Sciences > HG Finance
Journal of Economic Literature Classification System: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Sets: Departments > Finance
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 25 Apr 2013 15:31
URL: http://eprints.lse.ac.uk/37405/

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