Comomentum: Inferring Arbitrage Activity from Return Correlations

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 comome...

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Veröffentlicht in:The Review of financial studies 2022-07, Vol.35 (7), p.3272-3302
Hauptverfasser: Lou, Dong, Polk, Christopher
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhab117