Volume 29, Issue 5, 2020
DOI: 10.24205/03276716.2020.1063
Asymmetric Effect of Dumb Money on Momentum Evidence from the Stock Market
Abstract
This paper is moviated by money flowing from retail investors into mutual funds will exacerbate the momentum anomaly, which is referred to as “dumb moneyâ€. Here, with the Taiwan stock market considered as the setting, we document that aggregate mutual fund flows (dumb money) have a significantly negative impact on short-term momentum profit. Considering that momentum profits depend on the market states, we show that the impact of aggregate mutual fund flows on momentum profit is stronger following positive market returns. However, the impact of aggregate mutual fund flows on momentum profit is insignificant following negative market returns. Further, we confirm that mutual fund managers tend to buy loser stocks during a period of positive market returns compared with one of negative market returns by using an analysis of net trading volume. Our results not only suggest the importance of the influential role of mutual fund flows on momentum strategy but also provide the useful information for regulators to monitor the dynamic trading of mutual funds in the stock market.
Keywords
dumb money; momentum; aggregate mutual fund flows; market states JEL classification: G12, G14