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On short-term institutional trading skill, behavioral biases, and liquidity need

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  • Chakravarty, Sugato
  • Ray, Rina

Abstract

Are portfolio managers skilled or do they trade too much? Using a marked-to-market based “fair-value” method for measuring fund manager skill, we find that institutional managers can potentially earn +42 (+33) basis points benchmark-adjusted return before transaction costs after a holding period of four weeks on their buy (sell) trades. After transaction costs, the benchmark-adjusted return for the buy (sell) trades is +1 (-8) basis points. Pension fund managers outperform money managers. We are unable to detect evidence for overconfidence among pension fund managers over this short-horizon. In addition, we are unable to find evidence of disposition effect among mutual fund managers. Institutions tend to engage in short-term trades with holding period of four weeks (or less) despite only breaking-even or making economically insignificant (modest) benchmark-adjusted losses after round-trip transaction costs for liquidity, risk-management, or tax-minimization reasons. Among these, evidence for liquidity trading motive is the strongest.

Suggested Citation

  • Chakravarty, Sugato & Ray, Rina, 2020. "On short-term institutional trading skill, behavioral biases, and liquidity need," Journal of Corporate Finance, Elsevier, vol. 65(C).
  • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119920301930
    DOI: 10.1016/j.jcorpfin.2020.101749
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    More about this item

    Keywords

    Behavioral biases; Liquidity; Mutual fund managers; Pension fund managers; Skill;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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