Overselling Winners and Losers: How Mutual Fund Managers' Trading Behavior Affects Asset Prices

54 Pages Posted: 9 Dec 2014 Last revised: 24 Jun 2020

See all articles by Li An

Li An

Tsinghua University - PBC School of Finance

Bronson Argyle

Brigham Young University - Department of Finance

Date Written: May 1, 2020

Abstract

We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we nd that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are signi cantly more likely to manifest this trading pattern, and unrealized pro ts from such funds have stronger return predictability. This cross-sectional return predictability is dicult to reconcile with alternative explanations.

Keywords: mutual funds, disposition e ect, price pressure, cross-sectional return pre- dictability

JEL Classification: G11, G12, G23, G40

Suggested Citation

An, Li and Argyle, Bronson, Overselling Winners and Losers: How Mutual Fund Managers' Trading Behavior Affects Asset Prices (May 1, 2020). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2535693

Li An (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Bronson Argyle

Brigham Young University - Department of Finance ( email )

United States

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