Events
April
2019
May
2019

IFin Seminar, Cameron Peng, London School of Economics - "Positive Feedback Trading and Stock Prices: Evidence from Mutual Funds"

Institute of Finance

Date: / -

Seminar Title: "Positive Feedback Trading and Stock Prices: Evidence from Mutual Funds"

Prof. Cameron Peng, London School of Economics

12:25 - 13:40

Auditorium (main building, 3rd level)

Lugano Campus

 

Abstract

We show that mutual funds contribute to cross-sectional momentum and excess volatility through positive feedback trading. Stocks held by positive feedback funds exhibit much stronger momentum, almost doubling the returns from a simple momentum strategy. This “enhanced” momentum is robust to alternative measures of positive feedback trading and cannot be explained by other stock characteristics, ex-post firm fundamentals, fund flows, or herding. Moreover, enhanced momentum is almost fully reversed after one quarter, suggesting initial overshooting and subsequent reversal. We argue the most likely explanation is the price pressure from positive feedback trading. Finally, we relate positive feedback trading to mutual fund performance and show that it can positively predict a fund’s return from active management.

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