Download This PaperRatings-Driven Demand and Systematic Price Fluctuations
Fisher College of Business Working Paper No. 2020-03-026
Charles A. Dice Working Paper No. 2020-26
Review of Financial Studies, forthcoming
68 Pages Posted: 12 Nov 2020 Last revised: 28 Sep 2021
There are 2 versions of this paper
Ratings-Driven Demand and Systematic Price Fluctuations
Ratings-Driven Demand and Systematic Price Fluctuations
Date Written: September 28, 2021
Abstract
We show that mutual fund ratings generate 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, which reverted over time. In June 2002, Morningstar reformed its methodology of equalizing ratings across styles. Style-level correlated demand via mutual funds immediately became muted, significantly altering the time-series and cross-sectional variation in style returns.
Keywords: Correlated demand, style investing, mutual funds, momentum
JEL Classification: G11, G24, G41
Suggested Citation: Suggested Citation
Itzhak Ben-David (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
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