Changes in Investors' Market Attention and Near-Term Stock Market Returns

We use Google Search volume to track changes investors' positive and negative market attention. Our results support the hypothesis that this information reflects investors' optimistic and pessimistic anticipation and can be used to predict near-term future returns. We find that changes in negative search term volume of “market crash” and “bear market” and changes in positive search term volume “market rally” explain near-term stock returns. Changes in investors' attention are partly related to past stock market returns, implying that investors are prone to pay attention to possible price reversals. These measures of market attention are potential gauges of investor sentiment.     

Does past performance affect mutual fund tracking error in Taiwan?

This study examines the relationship between fund past performance and manager choice of portfolio risk in Taiwan. Employing the exponential generalized autoregressive conditional heteroscedasticity and linear regression models, the results demonstrate that historically poor average performance does not increase mutual fund tracking error (TE) or portfolio risk. Additionally, yearly tournament behaviour, namely mid-year losers increasing their last-half year TEs, only appears in funds with higher management fees. This implies that managers of high management fee funds actively increase TE in response to poor historical performance, to enable them to beat the market during future months or the second half of the year.     

A reliable performance measure to differentiate China’s actively managed open-end equity mutual funds

We compare different fund performance measures to examine which performance measures can generate risk-adjusted returns between high ranked and low ranked China’s actively managed open-end equity mutual funds. Our results show that only the six-factor (five factors (market, size, b/m, profitability & Investment facotrs) plus a momentum factor) alpha as the performance measure meets the criteria. Separated by the six-factor alpha, better performing funds have a larger asset under management, a better past 6-month cumulative return, a better stock picking ability, and a higher percentage of hybrid funds. Through our sample period from July 2004 to December 2015, the highest ranked quintile funds generate a monthly risk-adjusted return of 0.24% more than the lowest ranked quintile funds and the six-factor alpha reliably selects a better fund portfolio in both bear and bull markets on the basis of both fund return and holding data. Furthermore, our results from fund trading data show that funds with the highest six-factor alpha rank demonstrate a better trading skill in bear markets, suggesting that those better performing funds exhibit their market timing and stock picking abilities when investors need them most.     

Does High Stock Price Synchronicity Always Hurt Mutual Fund Industry? Sentiment Matters

Investors have agreed that high synchronicity of stock returns adversely influences professional funds' profitability. However, different market conditions where high synchronicity exists may have different effects on this relationship. This study incorporates aggregate investor sentiment as a market condition in the equation to explore whether and when the negative association between synchronicity and fund performance holds. The authors use a sample of actively managed U.S. equity mutual funds from 2000 to 2014 and employ a portfolio of 11 passively managed funds as the benchmark to measure fund performance and fund management skill. They find empirical evidence that synchronicity negatively impacts mutual funds' profitability when the investor sentiment is low. This negative relationship disappears in high-sentiment periods. They also find that in both low- and high-sentiment states, fund managers with superior stock selection skill make more profits from high synchronicity than the average.     

Risk aversion and portfolio allocation to mutual fund classes

The major factors affecting fund flows allocated to a range of mutual fund classes bearing different risk–return profiles are studied. The flexible functional form of the Almost Ideal Demand System (AIDS) is applied to identify the major drivers of Greek investors' demand patterns for equity, bond, balanced and money market funds, given the strong growth rates of the domestic fund market and the economy's latest entry into the EMU. An increase in household expenditure is shown to have a positive impact on mutual fund flows. An adverse price impact, however, may erode budget benefits towards a fund class, as the price factor appears to be important. The cross-price effects provide insight on complementarity and substitutability among the mutual fund classes. Variations in investors' risk aversion attitudes affect demand for mutual funds and can result in asset reallocation between the asset classes. The conclusions have useful policy implications particularly to asset fund management and portfolio allocation strategies and can be compared with established mutual fund markets.     

Investor Attention on the Social Web

We study investor attention through practitioners' tweeting behaviors. We develop formalisms of “cognitive niches,” heuristics from adaptive cognitive control, to account for the selectivity of investor attention. Using asset-specific tweets as direct measures of investor attention, we find evidence supporting contextual cognitive control, depending on asset types, investors' experience and investing approaches. We quantify attention contagion arising from the “social proof” heuristic, whereby the drawing power of the crowd in directing investor attention exceeds that of firm fundamentals. Finally, we demonstrate that different natures of investor attention (active or passive) reveals distinct patterns of trading volume, returns and volatility.     

The Relationship between Australian Mutual Fund Fees and Risk‐Adjusted Performance in Differing Economic Conditions

We find that Australian mutual fund investors should avoid high fee funds as these funds generate relatively low after‐fee risk‐adjusted returns both unconditionally and in weak economic conditions. This result is different from some of the previous findings which showed that US mutual funds with relatively high expense ratios may generate relatively higher risk‐adjusted returns during recessions relative to non‐recessions, although their unconditional alphas may be negative. We find some support for the Glode hypothesis in surviving Australian wholesale funds. High‐fee surviving Australian wholesale funds perform relatively strongly in both weak economic conditions and unconditionally. High‐fee funds in other types of Australian mutual funds generally do not perform strongly either in weak economic conditions or unconditionally. Amongst low‐fee funds, we commonly find that those that perform well unconditionally and well in weak economic conditions do charge more than those that perform well unconditionally and poorly in weak economic conditions. Amongst low‐fee funds, it is often true that those that perform poorly unconditionally but well in weak economic conditions can charge more than those that perform poorly unconditionally and poorly in weak economic conditions.     

On causality in the size-efficiency relationship: the effect of investor cash flows on the mutual fund industry

One of the perceived advantages in mutual fund management is the presence of economies of scale resulting from fund size. This article analyses the impact of mutual fund cash flows on the relation between size and performance, demonstrating that performance determines asymmetric variations in fund assets, particularly in mutual equity funds. Therefore, the more efficient funds generate broad enough cash flow entry that increases the relative size of the fund, leading to an implicit and positive relation between size and performance. So, if the average size over the period sample is used as a measure of size, such a relation would be biased. When the initial size is used, this bias is avoided and, in general, an insignificant relation is found between size and performance. These results are controlled by mutual fund costs using gross returns to estimate performance. The evidence is robust, and shows only weak evidence of a negative relation between size and performance for the balanced funds that is driven by a low positive relation between costs and size; precisely, the contrary that is expected from the hypothesis of the presence of economies of scale.     

Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds

Individual investors select high-fee index mutual funds despite the fact that the future payouts are nearly identical. The authors offer an explanation for this violation of the law of one price based on investor desire to diversify. While diversification in some settings may be beneficial, in the case of assets with identical payouts, fee minimization is the only rational strategy. The evidence confirms that investors diversify by selecting multiple higher fee funds rather than minimizing fees when investing in index mutual funds.     

The determination of public tuition fees in a mixed education system: A majority voting model

We study the determination of public tuition fees through majority voting in a vertical differentiation model where agents' returns on educational investment differ and public and private universities coexist and compete in tuition fees. The private university offers higher educational quality than its competitor, incurring higher unit cost per trained student. The tuition fee for the state university is fixed by majority voting while that for the private follows from profit maximization. Then agents choose to train at the public university or the private one or to remain uneducated. The tax per head adjusts in order to balance the state budget. Because there is a private alternative, preferences for education are not single‐peaked and no single‐crossing condition holds. An equilibrium is shown to exist, which is one of three types: high tuition fee (the “ends” are a majority), low tuition fee (the “middle” is a majority), or mixed (votes tie). The cost structure determines which equilibrium obtains. The equilibrium tuition is either greater (majority at the ends) or smaller (majority at the middle) than the optimal one.     

The Performance of Market‐Timing Strategies of Italian Mutual Fund Investors

In this paper, we show that simple buy‐and‐hold strategies over‐perform market‐timing strategies effectively used by Italian investors in equity mutual funds. We estimate returns from market‐timing strategies using aggregate data on net flows for a large sample of equity mutual funds, available to Italian investors, that buy stocks in the following markets: Europe and the euro area, the United States and Emerging markets. In all cases, buy‐and‐hold over‐performs market‐timing with extra returns that go from 0.24 per cent per quarter (Europe and euro area) to 0.87 per cent per quarter (US market). These differences are not explained by differences in risk and risk exposure. Investors should re‐consider their investment strategies and choose cheaper, in terms of fees and simpler, in terms of portfolio allocation, passive strategies.     

Information Sharing within the Networks of Delegated Portfolio Managers: Evidence from Plan Sponsors and Their Subadvisers

The authors study information sharing among delegated portfolio managers through networks connected by investment mandates between plan sponsors and their subadvisers. Specifically, they identify similarity in returns, holdings, and trading between mutual funds operated by subadvisers, and test whether such similarity is stronger when two funds share a mandate network. The authors find evidence consistent with information sharing among these delegated portfolio managers. A mutual fund on average shares more similar returns, holdings, and trading with funds in subadvisory mandate networks than with funds outside the networks. Preliminary evidence suggests that information about both general investment styles and individual firms is transferred within mandate networks.     

Managerial Expectations of Synergy and the Performance of Acquiring Firms: The Contribution of Soft Data

This study examines whether the “soft” information present in merger and acquisition (M&A) announcement press releases contains incrementally valuable news relative to traditional “hard” data. Using the methodology of Loughran and McDonald [2011], we construct measures of synergy expectations and managerial optimism for more than 1,200 M&A announcements over the period 1995–2007. We find that synergy expectations are positively related to announcement period returns, longer-run performance, and the market's reaction to quarterly earnings announcements. Managerial optimism is insignificant for explaining a merger's subsequent performance. We conclude that the soft information contained in M&A announcements concerning synergy expectations can provide useful information to investors.     

Tax-induced Dissimilarities Between Domestic and Foreign Mutual Funds in Italy

Using data from Italy over the period 1998–2002, this study investigates whether tax effects can account for differences in return patterns between domestic and foreign mutual funds, and if this dissimilarity translates into performance. The paper presents evidence that much of the difference between domestic and foreign funds is explained by the different tax systems. The asymmetry between the two groups, due to the fact that domestic funds are obliged to pay taxes on a daily basis while foreign funds are taxed when capital gains are collected, also affects performance. We prove that comparing pre-tax returns, Italian funds are virtually indistinguishable from their foreign counterparts in terms of risk-adjusted returns, while when comparing after-tax returns, foreign funds outperform.     

Beauty contest,bounded rationality,and sentiment pricing dynamics

We present a dynamic asset pricing model that incorporates investor sentiment, bounded rationality and higher-order expectations to study how these factors affect asset pricing equilibrium. In the model, we utilize a two-period trading market and investors make decisions based on the heterogeneous expectations principle and the “sparsity-based bounded rational” sentiment. We find that bounded rationality results in mispricing and reduces it in next period. Investor sentiment produces more significant effects than private signals, optimistic investor sentiment increases hedging demand, thus causing prices to soar. Higher-order investors are more rational and attentive to the strategies of other participants rather than private signals. This model also derives the dampening effect of higher-order expectations to price volatility and the heterogeneity expectation depicts inconsistent investor behavior in financial markets. In the model, investors' expectations about future price is distorted by their sentiment and bounded rationality, so they obtain a biased mean from the signal extraction.     

Smart fund managers? Stupid money?

Abstract .  We develop a model of mutual fund manager investment decisions near the end of quarters. We show that when investors reward better performing funds with higher cash flows, near quarter-ends a mutual fund manager has an incentive to distort new investment toward stocks in which his fund holds a large existing position. The short-term price impact of these trades increase the fund's reported returns. Higher returns are rewarded by greater subsequent fund inflows which, in turn, allow for more investment distortion the next quarter. Because the price impact of trades is short term, each subsequent quarter begins with a larger return deficit. Eventually, the deficit cannot be overcome. Thus, our model leads to the empirically observed short-run persistence and long-run reversal in fund performance. In doing so, our model provides a consistent explanation of many other seemingly contradictory empirical features of mutual fund performance.     

Noise traders and smart money: Evidence from online searches

Traditional finance theory considers that the impact of noise traders' attention on asset prices is offset by attention from smart investors. This paper uses online search data to study the influence of noise traders and smart investors on stock returns and volatility. Adopting an original approach, we construct a proxy for smart investor attention based on investors' online search behavior provided by Wikipedia Page Traffic. We combine this new measure with a standard measure of noise traders' attention as proxied by Google Search Volume Index. We show for a sample of 87 French firms over the period 2008–2018 that only noise traders' attention influences stock returns. Noise traders' attention increases volatility by creating an extra risk that is priced into the market. Conversely, smart investors' attention decreases volatility because their presence stabilizes stock prices by reducing uncertainty. Our empirical results support a behavioral explanation of stock prices.     

Ranking mutual fund families: minimum expenses and maximum loads as markers for moral turpitude

We evaluate the performance of 51 mutual fund families based on a study of their diversified US managed mutual funds over an 11-year-period and explore the determinants of performance gross of published expenses. We find that mutual fund families which charge loads, high expenses to their most favored investors and have high turnover tend to perform badly, even gross of these fees. However, gross of published expenses, managed mutual fund portfolios of those families without loads, with low expenses in their least expensive class, and with low average turnover beat the corresponding indexes.

Information acquisition and mutual funds

We study the formation of mutual funds by generalizing the standard competitive noisy rational expectations framework. In our model, informed agents set up mutual funds as a means of selling their private information to uninformed agents. We study the case of imperfect competition among fund managers, where uninformed agents invest simultaneously in multiple mutual funds. The size of the assets under management in the mutual fund industry is determined by endogenizing the agents' information acquisition decisions. Our model yields novel predictions on the informativeness of price, the optimal fees of mutual funds, and the equilibrium risk premium. In particular, we show that a sufficiently competitive mutual fund sector yields more informative prices and a lower equity risk premium.     

International Transmission of the People's Bank of China's Balance Sheet Expansion

The People's Bank of China's (PBoC) balance sheet expanded more dramatically than any of its major international counterparts during the past decade. The main contribution to this expansion was the rapid accumulation of the central bank's foreign assets, as a result of foreign exchange market intervention. In this paper, we examine the possible international transmission of this expansion by analyzing monthly data for China and 15 other countries over the period 2000–2012. Impulse response analysis based on vector autoregression modeling suggests that the PBoC's balance sheet expansion has greater impacts on developing than on developed countries. So far the influences appear to be dominated by “trade channels” instead of “financial channels,” possibly due to China's capital account controls. However, the impacts of the PBoC's balance sheet expansion on other countries' interest rates, exchange rates, and stock market prices could strengthen significantly in the coming years as China's economic scale grows and its capital account opens up.