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Discontinued Positive Feedback Trading and the Decline of Return Predictability / Itzhak Ben-David, Jiacui Li, Andrea Rossi, Yang Song.
- Format:
- Book
- Author/Creator:
- Ben-David, Itzhak.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w28624.
- NBER working paper series no. w28624
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2021.
- Summary:
- We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the "dumb money effect" in mutual funds, experienced sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.
- Notes:
- Print version record
- March 2021.
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