Information Networks: Implications for Mutual Fund Trading Behavior and Stock Returns

61 Pages Posted: 18 Mar 2009 Last revised: 9 Feb 2012

See all articles by Ankur Pareek

Ankur Pareek

Bucknell University, Freeman College of Management

Date Written: February 8, 2012

Abstract

This paper examines the effect of information networks on the trading behavior of mutual funds and on stock returns. An information or stock ownership linkage between two mutual funds is defined by large positions in the same stock. Mutual funds trade together with other funds in their information network after controlling for the overall trading behavior of the mutual fund sector. The effect is robust and cannot be explained by style investing or geographic location. The paper also examines the effect of the structure of information networks on stock returns and stock volatility. Using network density as a measure for the speed of information diffusion in a network of investors, I find that stocks with a lower network density demonstrate stronger return momentum over medium horizons and also show a delayed response to the market-wide information. The evidence is consistent with the gradual information diffusion model of Hong and Stein (1999). Finally, I provide empirical evidence in support of recent theoretical models that study the asset pricing implications of social networks. I show that centralized information networks lead to a higher volatility of individual stocks in the cross-section and also explain the variation in average stock idiosyncratic volatility over time.

Keywords: mutual funds, networks, information diffusion, momentum, volatility

JEL Classification: G12, G14, G23

Suggested Citation

Pareek, Ankur, Information Networks: Implications for Mutual Fund Trading Behavior and Stock Returns (February 8, 2012). AFA 2010 Atlanta Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1361779 or http://dx.doi.org/10.2139/ssrn.1361779

Ankur Pareek (Contact Author)

Bucknell University, Freeman College of Management ( email )

701 Moore Ave.
Lewisburg, PA 17837
United States

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