Mutual Fund Stockâ€ Picking Skill: New Evidence from Valuationâ€ versus Liquidityâ€ Motivated Trading
Janik Syryca and
Financial Management, 2018, vol. 47, issue 2, 309-347
We propose a novel Trade Motivation Matrix that allows differentiating fundsâ€™ valuationâ€ motivated (VM) and liquidityâ€ motivated (LM) trades on single trade level. It thus enables analyses of stockâ€ picking skill on three levels: trade, stock, and fund. On trade level, we find significant outperformance of VM buys and significant underperformance of VM sells, indicating manager stockâ€ picking skills, especially during illiquid market periods. VM trades outperform LM trades, confirming negative performance effects due to flow risk, especially when market liquidity is low. On stock level, collective VM buying explains high future stock returns while collective VM selling is related to future losses, indicating wisdom of the crowd. On fund level, higher trading discretion, measured by a higher degree of VM trading, is observed for smaller, older funds holding higher cash buffers. Finally, higher trading discretion is related to higher future fund alpha, especially during illiquid times.
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finmgt:v:47:y:2018:i:2:p:309-347
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