Tomorrow Is Another Day: Stocks Overweighted by Active Mutual Funds Predict the Next-Day Market

65 Pages Posted: 16 Aug 2021 Last revised: 4 May 2022

See all articles by Shuaiyu Chen

Shuaiyu Chen

Purdue University - Krannert School of Management

Yixin Chen

University of Rochester - Simon Business School

Randolph B. Cohen

Harvard University - Business School (HBS)

Date Written: August 14, 2021

Abstract

We show that active mutual fund managers effectively incorporate information about future short-term market movements into security prices. Specifically, when high active-mutual-fund ownership stocks outperform, the market tends to do well the next day, and vice-versa. These effects are modest day by day but are quite large in the aggregate - trading the S&P 500 futures daily based on the strategy delivers an average annual return over 15% with a Sharpe ratio over 0.9. The same findings are also present in other major equity markets all around the world. Various additional tests further suggest that the novel short-term market return predictability results from active mutual fund managers' collective information advantage about future market movements, as opposed to informed fund flows or temporary price pressure.

Keywords: Market Predictability, Active Mutual Funds, Market Efficiency

JEL Classification: G10, G14, G17, G23

Suggested Citation

Chen, Shuaiyu and Chen, Yixin and Cohen, Randolph B., Tomorrow Is Another Day: Stocks Overweighted by Active Mutual Funds Predict the Next-Day Market (August 14, 2021). Available at SSRN: https://ssrn.com/abstract=3905263 or http://dx.doi.org/10.2139/ssrn.3905263

Shuaiyu Chen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Yixin Chen (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Randolph B. Cohen

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
233
Abstract Views
1,356
rank
183,109
PlumX Metrics