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

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  • Zhi Da
  • Pengjie Gao
  • Ravi Jagannathan

Abstract

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. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Zhi Da & Pengjie Gao & Ravi Jagannathan, 2011. "Impatient Trading, Liquidity Provision, and Stock Selection by Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 675-720.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:3:p:675-720
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq074
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