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Does Stock Return Momentum Explain the "Smart Money" Effect?

Travis Sapp and Ashish Tiwari
The Journal of Finance
Vol. 59, No. 6 (Dec., 2004), pp. 2605-2622
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/3694783
Page Count: 18
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Does Stock Return Momentum Explain the "Smart Money" Effect?
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Abstract

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.

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