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Forecasting stock returns through an efficient aggregation of mutual fund holdings

  • Wermers, Russ
  • Yao, Tong
  • Zhao, Jane
Registered author(s):

    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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    File URL: http://econstor.eu/bitstream/10419/70129/1/736379347.pdf
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    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
    Contact details of provider: Postal: 0221 / 470 5607
    Phone: 0221 / 470 5607
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    Web page: http://cfr-cologne.de/english/version06/html/home.php
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    1. Olivier Scaillet & Laurent Barras & Russell R. Wermers, 2005. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas," Working Papers CEB 05-014.RS, ULB -- Universite Libre de Bruxelles.
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    18. Martijn Cremers & Antti Petajisto, 2006. "How Active is Your Fund Manager? A New Measure That Predicts Performance," Yale School of Management Working Papers amz2370, Yale School of Management, revised 01 May 2009.
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    25. Kosowski, Robert & Timmermann, Allan & Wermers, Russ & White, Hal, 2005. "Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis," CFR Working Papers 05-14, University of Cologne, Centre for Financial Research (CFR).
    26. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
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    28. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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