Working Paper: NBER ID: w28624
Authors: Itzhak Bendavid; Jiacui Li; Andrea Rossi; Yang Song
Abstract: We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the “dumb money effect” in mutual funds, experienced sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.
Keywords: No keywords provided
JEL Codes: G11; G24; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand effects caused by institutional frictions (H31) | long-term expected returns (G12) |
| 2002 Morningstar rating reform (G24) | structural break in style-level positive feedback trading by mutual funds (C58) |
| 2002 Morningstar rating reform (G24) | decline in momentum-related factors profitability (E11) |
| decline in momentum-related factors profitability (E11) | decline in mutual fund performance predictability (G17) |
| 2002 Morningstar rating reform (G24) | decline in mutual fund performance predictability (G17) |