Why Do Institutional Investors Chase Return Trends?

41 Pages Posted: 10 Nov 2006 Last revised: 10 Apr 2012

See all articles by Aydogan Alti

Aydogan Alti

University of Texas at Austin - Department of Finance

Uzi Yoeli

University of Texas at Austin - Department of Finance

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: April 2012

Abstract

We propose and test a simple explanation for institutional investors’ tendency to chase return trends. When investors face uncertainty about the precision of their private information, they wait for subsequent confirming news before establishing stock positions. While such news impact the stock price, at the same time they increase investors’ estimates of the precision of their information. With low information quality the latter effect dominates and causes investors to purchase the stock after confirming good news. We formalize these ideas in a simple model and test the model’s predictions on mutual funds’ stock holdings data. Using mutual funds’ past return experiences with individual stocks as a proxy for their stock-specific information quality, we find evidence for the prediction that trend chasing is more likely when information quality is low.

Suggested Citation

Alti, Aydogan and Yoeli, Uzi and Kaniel, Ron, Why Do Institutional Investors Chase Return Trends? (April 2012). Available at SSRN: https://ssrn.com/abstract=944150 or http://dx.doi.org/10.2139/ssrn.944150

Aydogan Alti (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Uzi Yoeli

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-1676 (Phone)

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

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