Ratings-Driven Demand and Systematic Price Fluctuations

Itzhak Ben-David, Jiacui Li, Andrea Rossi and Yang Song

No 28103, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that mutual fund ratings generate correlated demand that creates systematic price fluctuations. Mutual fund investors chase fund performance via Morningstar ratings. Until June 2002, funds pursuing the same investment style had highly correlated ratings. Therefore, rating-chasing investors directed capital into winning styles, generating style-level price pressures, which reverted over time. In June 2002, Morningstar reformed its methodology of equalizing ratings across styles. Style-level correlated demand via mutual funds immediately became muted, significantly altering the time-series and cross-sectional variation in style returns.

JEL-codes: G11 G24 G41 (search for similar items in EconPapers)
Date: 2020-11
Note: AP CF
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Forthcoming at the Review of Financial Studies

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Journal Article: Ratings-Driven Demand and Systematic Price Fluctuations (2022)
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