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When Does a Mutual Fund's Trade Reveal its Skill?

Author: Zhi Da; Pengjie Gao; Ravi Jagannathan
Publisher: Cambridge, Mass. National Bureau of Economic Research 2007.
Series: Working paper series (National Bureau of Economic Research), no. w13625.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We conjecture that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information-events. Taking the probability of informed trading (PIN, Easley, Kiefer, O'Hara, and Paperman, 1996) to measure the amount of informed trading in a stock, and inferring mutual fund trades from a large sample of mutual fund holdings, we provide empirical support for  Read more...
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Genre/Form: Electronic book
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Zhi Da; Pengjie Gao; Ravi Jagannathan
OCLC Number: 1027385051
Notes: November 2007.
Description: 1 online resource.
Details: Mode of access: World Wide Web.
Series Title: Working paper series (National Bureau of Economic Research), no. w13625.
Responsibility: Zhi Da, Pengjie Gao, Ravi Jagannathan.

Abstract:

We conjecture that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information-events. Taking the probability of informed trading (PIN, Easley, Kiefer, O'Hara, and Paperman, 1996) to measure the amount of informed trading in a stock, and inferring mutual fund trades from a large sample of mutual fund holdings, we provide empirical support for the conjecture. Funds trading high-PIN stocks exhibit superior performance on average, and superior performance that is more likely to persist. The findings are not due to price momentum or the higher returns earned by high-PIN stocks on average. Conclusions remain the same after testing for alternative measures for the amount of informed trading. Decomposing a fund's stock selection ability into "informed trading" and "liquidity provision" adds further insight into fund's underlying strengths. Impatient informed trading is a significant source of alpha for funds trading high-PIN stocks, while liquidity provision is more important as a source of alpha for funds trading low-PIN stocks.

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