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Mutual Fund Stock-Picking Skill: New Evidence from Valuation versus Liquidity-Motivated Trading

Financial Management, Forthcoming

Posted: 26 Nov 2015 Last revised: 19 Oct 2017

Martin Rohleder

University of Augsburg

Dominik Schulte

University of Augsburg

Janik Syryca

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: September 7, 2017

Abstract

We propose a novel Trade Motivation Matrix (TMM) that allows differentiating funds’ valuation-motivated (VM) and liquidity-motivated (LM) trades on single trade level. It thus enables analyses of stock-picking skill on three levels: trade, stock, and fund. On trade level, we find significant outperformance of VM buys and significant underperformance of VM sells, indicating manager stock-picking skills, especially during illiquid market periods. VM trades outperform LM trades, confirming negative performance effects due to flow risk, especially when market liquidity is low. On stock level, collective VM buying explains high future stock returns while collective VM selling is related to future losses, indicating wisdom of the crowd. On fund level, higher trading discretion, measured by a higher degree of VM trading, is observed for smaller, older funds holding higher cash buffers. Finally, higher trading discretion is related to higher future fund alpha, especially during illiquid times.

Keywords: Mutual fund trading, valuation, liquidity, skill, flow risk, wisdom of crowds

JEL Classification: G11, G20, G23

Suggested Citation

Rohleder, Martin and Schulte, Dominik and Syryca, Janik and Wilkens, Marco, Mutual Fund Stock-Picking Skill: New Evidence from Valuation versus Liquidity-Motivated Trading (September 7, 2017). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2695281 or http://dx.doi.org/10.2139/ssrn.2695281

Martin Rohleder (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Dominik Schulte

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Janik Syryca

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Marco Wilkens

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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