The Echo Effect of Momentum and Investor Trading Behavior

ABSTRACT This study examines the momentum echo effect using cross‐sectional momentum (CMOM) and idiosyncratic momentum (IMOM) in the Korean stock market. The results document robust evidence for CMOM‐based portfolios, while IMOM‐based portfolios exhibit contrasting evidence. Specifically, as the momentum formation period shifts from distant‐past to near‐past months, CMOM performance changes from positive to negative, while IMOM changes from negative to positive. These differences arise from contrasting trading behaviors of institutional and foreign (InsFOR) investors toward winner portfolios. For winner portfolios, InsFOR investors exhibit net buying of CMOM winners but net selling of IMOM winners. Their behavior reflects the delayed incorporation of public market information for CMOM and the underrecognition of firm‐specific information for IMOM.