Discontinued Positive Feedback Trading and the Decline of Return Predictability
AffiliationUniversity of Arizona
KeywordsEconomics and Econometrics
Positive feedback trading
MetadataShow full item record
PublisherCambridge University Press (CUP)
CitationBen-David, I., Li, J., Rossi, A., & Song, Y. (2021). Discontinued Positive Feedback Trading and the Decline of Return Predictability (No. w28624). National Bureau of Economic Research.
Rights© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Collection InformationThis item from the UA Faculty Publications collection is made available by the University of Arizona with support from the University of Arizona Libraries. If you have questions, please contact us at email@example.com.
AbstractWe show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the "dumb money effect" in mutual funds, experienced a sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.
VersionFinal accepted manuscript