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Does Stock Return Momentum Explain the “Smart Money” Effect?
Author(s) -
SAPP TRAVIS,
TIWARI ASHISH
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00710.x
Subject(s) - closed end fund , stock (firearms) , open end fund , mutual fund , financial economics , income fund , monetary economics , economics , phenomenon , business , momentum (technical analysis) , fund administration , fund of funds , finance , institutional investor , market liquidity , engineering , mechanical engineering , corporate governance , physics , quantum mechanics
Does the “smart money” effect documented by Gruber (1996) and Zheng (1999) reflect fund selection ability of mutual fund investors? We examine the finding that investors are able to predict mutual fund performance and invest accordingly. We show that the smart money effect is explained by the stock return momentum phenomenon documented by Jegadeesh and Titman (1993). Further evidence suggests investors do not select funds based on a momentum investing style, but rather simply chase funds that were recent winners. Our finding that a common factor in stock returns explains the smart money effect offers no affirmation of investor fund selection ability.