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Forecasting stock returns through an efficient aggregation of mutual fund holdings

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  • Wermers, Russ
  • Yao, Tong
  • Zhao, Jane
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    Abstract

    We develop a stock return-predictive measure based on an efficient aggregation of the portfolio holdings of all actively managed U.S. domestic equity mutual funds, and use this model to study the source of fund managers' stock-selection abilities. This generalized-inverse alpha (GIA) approach reveals differences in the ability of managers to predict firms' future earnings from fundamental research. Notably, the GIA's return-forecasting power is not subsumed by publicly available quantitative predictors, such as momentum, value, and earnings quality, nor is it subsumed by methods shown in past research to forecast stock returns using fund holdings or trades. --

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    Bibliographic Info

    Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 06-09 [rev.].

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    Date of creation: 2012
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    Handle: RePEc:zbw:cfrwps:0609r

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    4. Laurent BARRAS & Olivier SCAILLET & Russ WERMERS, 2005. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Swiss Finance Institute Research Paper Series 08-18, Swiss Finance Institute, revised Sep 2008.
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