Crowding and tail risk in momentum returns

Pedro Barroso, Roger M. Edelen, Paul Karehnke*

*Corresponding author for this work

Research output: Working paperPreprint



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' emands. Using this logic we develop a crowding model for momentum returns that predicts tail risk when arbitrageurs ignore feedback effects. However, crowding does not generate tail risk when arbitrageurs rationally condition on feedback. Consistent with rational demands, our empirical analysis generally finds a negative relation between crowding proxies constructed from institutional holdings and expected crash risk. Thus our analysis casts both theoretical and empirical doubt on crowding as a stand-alone source of tail risk.
Original languageEnglish
Number of pages50
Publication statusPublished - 1 Oct 2020


  • Crowded trade
  • Destabilize
  • Momentum trading
  • Institutional investors
  • crash risk


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