Decoding Momentum Spillover Effects

Huaixin Wang

♦ This paper studies the making of return predictability among economically linked firms. I characterize an asymmetric cross-firm tug-of-war: (1) high peer overnight returns are followed by elevated overnight returns for focal stocks, which fully reverse during intraday; (2) high peer intraday returns are followed by high intraday returns but minor overnight price reactions. This pattern accords with the story that individuals’ persistent trading on salient information distorts opening prices, while slow-moving arbitrage by professional investors gradually corrects mispricing. Mutual fund and hedge fund flows exhibit distinct associations with the tug-of-war, supporting the hypothesis that heterogeneous demand drives the return predictability.

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