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The relation of the disposition effect to mutual fund trades and performance

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  • Cici, Gjergji
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    Abstract

    We document that, on average, U.S. equity mutual funds prefer realizing capital losses rather than capital gains. A substantial fraction of the sample, however, exhibits the opposite tendency of realizing gains more readily than losses. The documented tendency for this subset appears to be due to the disposition effect. When funds experience outflows and are managed by teams of portfolio managers, they appear more susceptible to sell disproportionately more winners than losers. Disposition-driven behavior affects mutual fund investment styles, causing lower market betas and characteristics of valueoriented and short-term contrarian styles but does not affect mutual fund performance. --

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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 11-05.

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    Date of creation: 2011
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    Handle: RePEc:zbw:cfrwps:1105

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    1. David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    2. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
    3. Clemens Sialm & Laura Starks, 2012. "Mutual Fund Tax Clienteles," Journal of Finance, American Finance Association, vol. 67(4), pages 1397-1422, 08.
    4. Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, 08.
    5. Pastor, Lubos & Stambaugh, Robert F., 2002. "Mutual fund performance and seemingly unrelated assets," Journal of Financial Economics, Elsevier, vol. 63(3), pages 315-349, March.
    6. Daniel Bergstresser & James Poterba, 2000. "Do After-Tax Returns Affect Mutual Fund Inflows?," NBER Working Papers 7595, National Bureau of Economic Research, Inc.
    7. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    8. Massa, Massimo & Reuter, Jonathan & Zitzewitz, Eric, 2010. "When should firms share credit with employees? Evidence from anonymously managed mutual funds," Journal of Financial Economics, Elsevier, vol. 95(3), pages 400-424, March.
    9. Amit Seru & Tyler Shumway & Noah Stoffman, 2010. "Learning by Trading," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 705-739, February.
    10. Michael J. Cooper & Huseyin Gulen & P. Raghavendra Rau, 2005. "Changing Names with Style: Mutual Fund Name Changes and Their Effects on Fund Flows," Journal of Finance, American Finance Association, vol. 60(6), pages 2825-2858, December.
    11. Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
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