Market Feedback Trading in Mutual Funds

64 Pages Posted: 30 Apr 2020 Last revised: 28 May 2021

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

Jing Ding

Tsinghua University

Lei Jiang

Tsinghua University

Yuehua Tang

University of Florida - Department of Finance

Date Written: May 28, 2021

Abstract

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

Busse, Jeffrey A. and Ding, Jing and Jiang, Lei and Tang, Yuehua, Market Feedback Trading in Mutual Funds (May 28, 2021). Available at SSRN: https://ssrn.com/abstract=3554763 or http://dx.doi.org/10.2139/ssrn.3554763

Jeffrey A. Busse

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

Jing Ding

Tsinghua University ( email )

Beijing, 100084
China
(+86)18811327918 (Phone)

Lei Jiang (Contact Author)

Tsinghua University ( email )

Beijing, 100084
China

Yuehua Tang

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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