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Overselling winners and losers: How mutual fund managers' trading behavior affects asset prices

Li An and Bronson Argyle

Journal of Financial Markets, 2021, vol. 55, issue C

Abstract: We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This cross-sectional return predictability is difficult to reconcile with alternative explanations.

Keywords: Mutual funds; Disposition effect; Price pressure; Cross-sectional return predictability (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 G40 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300495

DOI: 10.1016/j.finmar.2020.100580

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