Do Stock-Level Experienced Returns Affect Security Selection?

45 Pages Posted: 10 Feb 2018 Last revised: 11 May 2021

See all articles by Constantinos Antoniou

Constantinos Antoniou

University of Warwick - Warwick Business School

Shema F. Mitali

Ecole Polytechnique Fédérale de Lausanne

Date Written: July 24, 2018

Abstract

We examine whether the managers of equity mutual funds exhibit reinforcement learning, investing more heavily in firms in which they previously experienced higher returns. The results reliably support this hypothesis. Experienced returns affect managers' re-balancing decisions in response to flows, and influence investments at the style level. Experienced returns do not affect the investments of index-tracking funds. When new managers come in a fund, their experiences with stocks in their old funds, influence the investments in these stocks by their new funds. Funds managed by managers who rely more on reinforcement learning, earn lower returns. Experienced returns, when aggregated across managers for each stock, predict lower stock returns. Overall, our evidence indicates that reinforcement learning affects the stock-specific return trades of portfolio managers, with important implications for fund performance and asset prices.

Keywords: Reinforcement Learning, Decision from Experience, Mutual Funds, Behavioral Finance

JEL Classification: G11, G23, G40

Suggested Citation

Antoniou, Constantinos and Mitali, Shema, Do Stock-Level Experienced Returns Affect Security Selection? (July 24, 2018). Available at SSRN: https://ssrn.com/abstract=3116073 or http://dx.doi.org/10.2139/ssrn.3116073

Constantinos Antoniou

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Shema Mitali (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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