Does Stock Return Momentum Explain the “Smart Money” Effect?
Article first published online: 27 NOV 2005
The Journal of Finance
Volume 59, Issue 6, pages 2605–2622, December 2004
How to Cite
SAPP, T. and TIWARI, A. (2004), Does Stock Return Momentum Explain the “Smart Money” Effect?. The Journal of Finance, 59: 2605–2622. doi: 10.1111/j.1540-6261.2004.00710.x
- Issue published online: 27 NOV 2005
- Article first published online: 27 NOV 2005
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.