Hostname: page-component-848d4c4894-v5vhk Total loading time: 0 Render date: 2024-07-05T09:44:11.716Z Has data issue: false hasContentIssue false
  • English
  • Français

On the Style-Based Feedback Trading of Mutual Fund Managers

Published online by Cambridge University Press:  29 July 2016

Bart Frijns ,
Aaron Gilbert  and
Remco C. J. Zwinkels
Bart Frijns*
Affiliation:
bfrijns@aut.ac.nz, Auckland University of Technology, Business School, Auckland, New Zealand
Aaron Gilbert
Affiliation:
agilbert@aut.ac.nz, Auckland University of Technology, Business School, Auckland, New Zealand
Remco C. J. Zwinkels
Affiliation:
r.zwinkels@vu.nl, VU University Amsterdam, Faculty of Economics and Business Administration, Amsterdam 1081 HV, The Netherlands, and Tinbergen Institute.
*
*Corresponding author: bfrijns@aut.ac.nz
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the style-based feedback trading behavior of U.S. mutual fund managers. We provide an empirical version of Barberis and Shleifer’s style-switching model. We find style-based feedback trading for 77% of the funds, half of which is positive (negative) feedback trading. There is evidence for “twin style” switching, where capital is channeled between value and growth, and between large- and small-cap. Growth (value) funds apply more positive (negative) feedback trading. Funds that switch more aggressively are younger and have higher expense ratios. Finally, we find that positive (negative) feedback trading yields positive (negative) alpha.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 3 , June 2016 , pp. 771 - 800
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Annaert, J., and van Campenhout, G.. “Time Variation in Mutual Fund Style Exposures.” Review of Finance, 11 (2007), 633–661.Google Scholar
Bange, M. M. “Do the Portfolios of Small Investors Reflect Positive Feedback Trading?” Journal of Financial and Quantitative Analysis, 35 (2000), 239–255.Google Scholar
Barberis, N., and Shleifer, A.. “Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.CrossRefGoogle Scholar
Blackburn, D. W.; Goetzmann, W. N.; and Ukhov, A. D.. “Is Trading Behavior Stable across Contexts? Evidence from Style and Multi-Style Investors.” Quantitative Finance, 14 (2014), 605–627.CrossRefGoogle Scholar
Brock, W. A., and Hommes, C. H.. “A Rational Route to Randomness.” Econometrica, 65 (1997), 1059–1095.Google Scholar
Brock, W. A., and Hommes, C. H.. “Heterogeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model.” Journal of Economic Dynamics and Control, 22 (1998), 1235–1274.Google Scholar
Brown, S. J., and Goetzmann, W. N.. “Mutual Fund Styles.” Journal of Financial Economics, 43 (1997), 373–399.CrossRefGoogle Scholar
Brown, S. J., and Goetzmann, W. N.. “Hedge Funds with Style.” National Bureau of Economic Research Working Paper No. 8173 (2001).Google Scholar
Brown, K. C., and Harlow, W. V.. “Staying the Course: Performance Persistence and the Role of Investment Style Consistency in Professional Asset Management.” Working Paper, University of Texas (2005).Google Scholar
Brown, K. C.; Harlow, W. V.; and Starks, L. T.. “Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry.” Journal of Finance, 51 (1996), 85–110.CrossRefGoogle Scholar
Brown, K. C.; Harlow, W. V.; and Zhang, H.. “Investment Style Volatility and Mutual Fund Performance.” Working Paper, University of Texas (2011).Google Scholar
Budiono, D., and Martens, M.. “Mutual Fund Style Timing Skills and Alpha.” Working Paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341740 (2009).CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chan, L. K.; Chen, H.-L.; and Lakonishok, J.. “On Mutual Fund Investment Styles.” Review of Financial Studies, 15 (2002), 1407–1437.Google Scholar
Chen, H. L., and Wermers, R.. “Style Migration and the Cross-Section of Average Stock Returns.” Working Paper, University of Chicago (2005).Google Scholar
Choe, H.; Kho, B. C.; and Stulz, R.. “Do Foreign Investors Destabilize Stock Markets?” Journal of Financial Economics, 54 (1999), 227–264.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Rau, P. R.. “Changing Names with Style: Mutual Fund Name Changes and Their Effects on Fund Flows.” Journal of Finance, 60 (2005), 2825–2858.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Froot, K. A.; O’Connell, P. G. J.; and Seasholes, M. S.. “The Portfolio Flows of International Investors.” Journal of Financial Economics, 59 (2001), 149–193.Google Scholar
Froot, K., and Teo, M.. “Style Investing and Institutional Investors.” Journal of Financial and Quantitative Analysis, 43 (2008), 883–906.CrossRefGoogle Scholar
Goetzmann, W. N., and Massa, M.. “Daily Momentum and Contrarian Behavior of Index Fund Investors.” Journal of Financial and Quantitative Analysis, 37 (2002), 375–389.Google Scholar
Grinblatt, M.; Titman, S.; and Wermers, R.. “Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior.” American Economic Review, 85 (1995), 1088–1105.Google Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.Google Scholar
Keim, D. B., and Madhavan, A.. “Anatomy of the Trading Process: Empirical Evidence on the Behavior of Institutional Investors.” Journal of Financial Economics, 37 (1995), 371–398.Google Scholar
Levis, M., and Liodakis, M.. “The Profitability of Style Rotation Strategies in the United Kingdom.” Journal of Portfolio Management, 26 (1999), 73–86.CrossRefGoogle Scholar
Manski, C. F., and McFadden, D.. Structural Analysis of Discrete Data with Econometric Applications. Cambridge, MA: MIT Press (1981).Google Scholar
Pomorski, L. “Style Investing: Evidence from Mutual Fund Flows.” Working Paper, University of Toronto (2004).Google Scholar
Sirri, E., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 1589–1662.Google Scholar
Swinkels, L., and Tjong-A-Tjoe, L.. “Can Mutual Funds Time Investment Styles?” Journal of Asset Management, 8 (2007), 123–132.Google Scholar
Teo, M., and Woo, S.-J.. “Style Effects in the Cross-Section of Stock Returns.” Journal of Financial Economics, 74 (2004), 367–398.Google Scholar
Wermers, R. “Matter of Style: The Causes and Consequences of Style Drift in Institutional Portfolios.” Working Paper, University of Maryland (2012).Google Scholar