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Daily Momentum and Contrarian Behavior of Index Fund Investors

  • William N. Goetzmann
  • Massimo Massa

We use a two-year panel of individual accounts in an S&P 500 index mutual fund to examine the trading and investment behavior of more than 91 thousand investors who have chosen a low-cost, passively managed vehicle for savings. This allows us to characterize investors' heterogeneity in terms of their investment patterns. In particular, we identify positive feedback traders as well as contrarians whose activities are conditional upon preceding day stock market moves. We test the consistency and profitability of these conditional strategies over time. We find that more frequent traders are typically contrarians, while infrequent traders are more typically momentum investors. The dynamics of these investor classes help us to partially examine the question of the marginal investor over the period of our study. We find that the behavior of momentum investors is typically more correlated to changes in the S&P 500 and we trace its dynamics over time. We build up behavioral factors' based on contrarian and momentum flows and show that they perform well against a benchmark of loadings on latent factors extracted from returns. We also use the behavior of momentum and contrarian investors to build a measure of market polarization.' This captures the dispersion of beliefs among the investors and helps to account for asset pricing better than standard measures of dispersion of beliefs.

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File URL: http://www.nber.org/papers/w7567.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7567.

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Date of creation: Feb 2000
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Publication status: published as Goetzmann, William N. and Massimo Massa. "Daily Momentum And Contrarian Behavior Of Index Fund Investors," Journal of Financial and Quantitative Analysis, 2002, v37(3,Sep), 375-389.
Handle: RePEc:nbr:nberwo:7567
Note: AP
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  10. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, vol. 49(5), pages 1665-98, December.
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  20. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1991. "Do Institutional Investors Destabilize Stock Prices? Evidence on Herding and Feedback Trading," NBER Working Papers 3846, National Bureau of Economic Research, Inc.
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  22. Robert A. Levy, 1967. "Relative Strength As A Criterion For Investment Selection," Journal of Finance, American Finance Association, vol. 22(4), pages 595-610, December.
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