Comomentum: inferring arbitrage activity from return correlations

Dong Lou and Christopher Polk

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We propose a novel measure of arbitrage activity to examine whether arbitrageurs can have a destabilizing effect on 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 that pushes prices away from fundamentals.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Keywords: Paul; Woolley; Centre (search for similar items in EconPapers)
JEL-codes: G12 G23 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2022-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Review of Financial Studies, 1, July, 2022, 35(7), pp. 3272 - 3302. ISSN: 0893-9454

Downloads: (external link)
http://eprints.lse.ac.uk/109318/ Open access version. (application/pdf)

Related works:
Journal Article: Comomentum: Inferring Arbitrage Activity from Return Correlations (2022)
Working Paper: Comomentum: inferring arbitrage activity from return correlations (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:109318

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