Are Institutions Momentum Traders?

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Abstract
This paper examines institutional trading in momentum portfolios. The key result is that institutions engage in momentum trading over the subsequent 3 quarters, buying winners and selling losers, in response to past returns but not past earnings news. Momentum trading is strengthened, however, when returns are accompanied by earnings news of the same sign. While past high returns predict future institutional buying, past institutional buying does not predict future stock returns. Among institutions, investment advisors (e.g., mutual funds and brokerage firms) are the most active momentum traders; banks and insurance companies are the least active. Additional tests indicate that institutional momentum trading is concentrated among high volume winners and losers and among low B/M winners and high B/M losers.

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