Market Feedback Trading in Mutual Funds
64 Pages Posted: 30 Apr 2020 Last revised: 28 May 2021
Date Written: May 28, 2021
Using mutual fund stock transactions and daily fund returns, we find that funds increase their betas after positive market returns and vice versa, i.e., they exhibit positive feedback trading with respect to the stock market. Feedback trading impacts traditional estimates of market timing, leading to “artificial” timing that helps to explain the inverse relation between estimates of market timing and stock selectivity. Despite incurring transaction costs, funds that feedback trade perform relatively well during the 2008-2009 financial crisis and attract investor flows.
Keywords: Feedback trading, mutual funds, market timing, fund beta, transaction costs
JEL Classification: G11, G23
Suggested Citation: Suggested Citation