Advice-Driven Demand and Systematic Price Fluctuations

Fisher College of Business Working Paper No. 2020-03-026

Charles A. Dice Working Paper No. 2020-26

65 Pages Posted: 12 Nov 2020 Last revised: 2 Feb 2021

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Jiacui Li

David Eccles School of Business, University of Utah

Andrea Rossi

University of Arizona - Department of Finance

Yang Song

University of Washington - Michael G. Foster School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2020

Abstract

We show that advice in the form of mutual fund ratings generates correlated demand that creates systematic price fluctuations. Mutual fund investors chase fund performance via Morningstar ratings. Until June 2002, funds pursuing the same investment style had highly correlated ratings. Therefore, rating-chasing investors directed capital into winning styles, generating style-level price pressures that reverted over time. In June 2002, Morningstar reformed its methodology to equalize ratings across styles. Style-level correlated demand via mutual funds immediately became muted, significantly altering the time-series and cross-sectional variation of style returns. Advice-driven demand also explains substantial variation in the size and value factors.

Keywords: Correlated demand, style investing, mutual funds, momentum

JEL Classification: G11, G24, G41

Suggested Citation

Ben-David, Itzhak and Li, Jiacui and Rossi, Andrea and Song, Yang, Advice-Driven Demand and Systematic Price Fluctuations (November 7, 2020). Fisher College of Business Working Paper No. 2020-03-026, Charles A. Dice Working Paper No. 2020-26, Available at SSRN: https://ssrn.com/abstract=3728056 or http://dx.doi.org/10.2139/ssrn.3728056

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Jiacui Li

David Eccles School of Business, University of Utah ( email )

8123 SFEBB, 1655 Campus Center Dr
Salt Lake City, UT 84112
United States

HOME PAGE: http://https://www.jiacui-li.com/

Andrea Rossi

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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