Trading on momentum may intensify the anomaly rather than eliminate it.

Evidence

The “momentum effect” is exploited widely in trading it is, for example, a familiar hedge-fund strategy but that does not seem to have eliminated it (Jegadeesh and Titman 2001). Roll and Ross Asset Management, for example, found that the effect has “been a pretty long-term thing” (Roll interview). In the case of other anomalies, exploitation seems to tend to diminish their size, but that may not be so with the momentum effect, which conceivably may be intensified by the trading that exploits it. For example, buying a “winner” to exploit its momentum may have the effect of making it more of a winner, encouraging other “momentum traders” likewise to buy. — Donald MacKenzie, An Engine, Not a Camera, 456

Categorization

• SEED: A self-reinforcing market feedback loop where arbitrage worsens the anomaly is a sharp counterexample to the view that arbitrage always corrects mispricing — a strong essay angle on how exploitation shifts from correcting to amplifying.
• XREF: connects to: Market anomalies shrink once identified, partly because traders exploit them. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 433; Fama attributed anomalies to CAPM flaws, not market inefficiency. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 430; Trading on a CAPM anomaly would have performed it away by bidding up prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 397

Broader Connections

• Trading on a CAPM anomaly would have performed it away by bidding up prices #contradicts (0.85) — Donald MacKenzie, An Engine, Not a Camera, 397