Journal Article

Impatient Trading, Liquidity Provision, and Stock Selection by Mutual Funds

Zhi Da, Pengjie Gao and Ravi Jagannathan

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 24, issue 3, pages 675-720
Published in print March 2011 | ISSN: 0893-9454
Published online September 2010 | e-ISSN: 1465-7368 | DOI: http://dx.doi.org/10.1093/rfs/hhq074
Impatient Trading, Liquidity Provision, and Stock Selection by Mutual Funds

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We show that a mutual fund's stock selection skill can be decomposed into additional components that include liquidity-absorbing impatient trading and liquidity provision. We find that past performance predicts future performance better among funds trading in stocks affected more by information events: Past winners earn a risk-adjusted after-fee excess return of 35 basis points per month in the future. Most of that superior performance comes from impatient trading. We also find that impatient trading is more important for growth-oriented funds, and liquidity provision is more important for younger income funds.

Keywords: G11; G23

Journal Article.  21904 words.  Illustrated.

Subjects: Financial Markets

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