Why Do Institutional Investors Chase Return Trends?

46 Pages Posted: 20 Jan 2012

See all articles by Aydogan Alti

Aydogan Alti

University of Texas at Austin - Department of Finance

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Uzi Yoeli

University of Texas at Austin - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 2012

Abstract

We propose and test a simple explanation for institutional investors’ tendency to chase return trends. When investors face uncertainty about the precision of their private information, they wait for subsequent confirming news before establishing stock positions. While such news impact the stock price, at the same time they increase investors’ estimates of the precision of their information. With low information quality the latter effect dominates and causes investors to purchase the stock after confirming good news. We formalize these ideas in a simple model and test the model’s predictions on mutual funds’ stock holdings data. Using mutual funds’ past return experiences with individual stocks as a proxy for their stock-specific information quality, we find evidence for the prediction that trend chasing is more likely when information quality is low.

Keywords: Institutional Investors, momentum, mutual funds, return trends

JEL Classification: G11, G20

Suggested Citation

Alti, Aydogan and Kaniel, Ron and Yoeli, Uzi, Why Do Institutional Investors Chase Return Trends? (January 2012). CEPR Discussion Paper No. DP8773. Available at SSRN: https://ssrn.com/abstract=1988704

Aydogan Alti (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Uzi Yoeli

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-1676 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3
Abstract Views
688
PlumX Metrics