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Inexperienced investors and bubbles

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Author Info
Greenwood, Robin
Nagel, Stefan

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Abstract

We use mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles. Using age as a proxy for managers' investment experience, we find that around the peak of the technology bubble, mutual funds run by younger managers are more heavily invested in technology stocks, relative to their style benchmarks, than their older colleagues. Furthermore, young managers, but not old managers, exhibit trend-chasing behavior in their technology stock investments. As a result, young managers increase their technology holdings during the run-up, and decrease them during the downturn. Both results are in line with the behavior of inexperienced investors in experimental asset markets. The economic significance of young managers' actions is amplified by large inflows into their funds prior to the peak in technology stock prices.

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File URL: http://www.sciencedirect.com/science/article/B6VBX-4W38RMY-1/2/aa0b2f507b6c4a5773eaa9df6c9ccac0
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Publisher Info
Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 93 (2009)
Issue (Month): 2 (August)
Pages: 239-258
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Handle: RePEc:eee:jfinec:v:93:y:2009:i:2:p:239-258

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Asset price bubbles Investment experience Investor age Trend chasing;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip Maymin, 2010. "The Hazards of Propping Up: Bubbles and Chaos," Quantitative Finance Papers 1002.2282, arXiv.org. [Downloadable!]
  2. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," NBER Working Papers 13189, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Fabrice Rousseau & Laurent Germain & Fabrice Rousseau & Anne Vanhems, 2008. "Irrational Financial Markets," Economics, Finance and Accounting Department Working Paper Series n1870108.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
  4. Menkhoff, Lukas & Schmeling, Maik & Schmidt, Ulrich, 2008. "Are all professional investors sophisticated?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-397, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  5. Kaizoji, Taisei (kaizoji@icu.ac.jp), 2010. "A Behavioral Model of Bubbles and Crashes," MPRA Paper 20352, University Library of Munich, Germany. [Downloadable!]
  6. Paola Giuliano & Antonio Spilimbergo, 2009. "Growing Up in a Recession: Beliefs and the Macroeconomy," NBER Working Papers 15321, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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