Lou, Dong 
ORCID: 0000-0002-5623-4338
(2012)
A flow-based explanation for return predictability.
Review of Financial Studies, 25 (12).
pp. 3457-3489.
ISSN 0893-9454
Abstract
I propose and test a capital-flow-based explanation for some well-known empirical regularities concerning return predictability—the persistence of mutual fund performance, the “smart money” effect, and stock price momentum. First, I construct a measure of demand shocks to individual stocks by aggregating flow-induced trading across all mutual funds, and document a significant, temporary price impact of such uninformed trading. Next, given that mutual fund flows are highly predictable, I show that the expected part of flow-induced trading positively forecasts stock and mutual fund returns in the following year, which are then reversed in subsequent years. The main findings of the paper are that the flow-driven return effect can fully account for mutual fund performance persistence and the smart money effect, and can partially explain stock price momentum.
| Item Type: | Article |
|---|---|
| Official URL: | http://rfs.oxfordjournals.org/ |
| Additional Information: | © 2012 The Author |
| Divisions: | Financial Markets Group |
| Subjects: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions |
| Date Deposited: | 26 Nov 2012 09:19 |
| Last Modified: | 13 Nov 2024 01:57 |
| URI: | http://eprints.lse.ac.uk/id/eprint/46328 |
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