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Forecasting stock returns through an efficient aggregation of mutual fund holdings

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  • Wermers, Russ
  • Yao, Tong
  • Zhao, Jane

Abstract

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.

Suggested Citation

  • Wermers, Russ & Yao, Tong & Zhao, Jane, 2012. "Forecasting stock returns through an efficient aggregation of mutual fund holdings," CFR Working Papers 06-09 [rev.], University of Cologne, Centre for Financial Research (CFR).
  • Handle: RePEc:zbw:cfrwps:0609r
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    References listed on IDEAS

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    Cited by:

    1. Harris, Lawrence E. & Hartzmark, Samuel M. & Solomon, David H., 2015. "Juicing the dividend yield: Mutual funds and the demand for dividends," Journal of Financial Economics, Elsevier, vol. 116(3), pages 433-451.
    2. repec:eee:jbfina:v:82:y:2017:i:c:p:151-164 is not listed on IDEAS
    3. Lan, Chunhua & Moneta, Fabio & Wermers, Russ, 2015. "Mutual fund investment horizon and performance," CFR Working Papers 15-06, University of Cologne, Centre for Financial Research (CFR).
    4. Cai, Yu & Lau, Sie Ting, 2015. "Informed trading around earnings and mutual fund alphas," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 168-180.
    5. Suresh Nallareddy & Maria Ogneva, 0. "Accrual quality, skill, and the cross-section of mutual fund returns," Review of Accounting Studies, Springer, vol. 0, pages 1-40.
    6. repec:spr:reaccs:v:22:y:2017:i:2:d:10.1007_s11142-017-9389-z is not listed on IDEAS
    7. repec:bla:acctfi:v:57:y:2017:i:1:p:113-129 is not listed on IDEAS
    8. repec:bla:acctfi:v:57:y:2017:i::p:101-116 is not listed on IDEAS

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