Crowding and Tail Risk in Momentum Returns

Abstract Several theoretical studies suggest that coordination problems can cause arbitrageur crowding to push asset prices beyond fundamental value as investors feedback trade on each others’ demands. Using this logic, we develop a model for momentum returns predicts tail risk when arbitrageurs ignore effects. However, does not generate rationally condition feedback. Consistent with rational demands, our empirical analysis generally finds negative relation between proxies constructed from institutional holdings and expected crash risk. Thus casts both doubt stand-alone source of