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Positive feedback trading and stock prices: evidence from mutual funds

Peng, Cheng and Wang, Chen (2019) Positive feedback trading and stock prices: evidence from mutual funds. . SSRN.

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Identification Number: 10.2139/ssrn.3327849

Abstract

We show that mutual funds contribute to cross-sectional momentum and excess volatility through positive feedback trading. Stocks held by positive feedback funds exhibit much stronger momentum, almost doubling the returns from a simple momentum strategy. This “enhanced” momentum is robust to alternative measures of positive feedback trading and cannot be explained by other stock characteristics, ex-post firm fundamentals, fund flows, or herding. Moreover, enhanced momentum is almost fully reversed after one quarter, suggesting initial overshooting and subsequent reversal. We argue the most likely explanation is the price pressure from positive feedback trading. Finally, we relate positive feedback trading to mutual fund performance and show that it can positively predict a fund’s return from active management.

Item Type: Monograph (Working Paper)
Official URL: https://ssrn.com/abstract=3066369
Additional Information: © 2019 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions
Date Deposited: 11 Oct 2019 11:57
Last Modified: 18 Oct 2020 23:27
URI: http://eprints.lse.ac.uk/id/eprint/102059

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