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Follow the leader: fund managers trading in signal-strength sequence
When fund managers trade sequentially in the same direction, the information confirmation hypothesis predicts the long‐term profitability of the leader trade to be increasing in the number of subsequent trades. The information cascade hypothesis predicts a non‐positive relationship. Using active equ...
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Published in: | Accounting and finance (Parkville) 2011-09, Vol.51 (3), p.684-710 |
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Main Authors: | , , , |
Format: | Article |
Language: | English |
Subjects: | |
Citations: | Items that this one cites Items that cite this one |
Online Access: | Get full text |
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Summary: | When fund managers trade sequentially in the same direction, the information confirmation hypothesis predicts the long‐term profitability of the leader trade to be increasing in the number of subsequent trades. The information cascade hypothesis predicts a non‐positive relationship. Using active equity funds’ daily trading data, we document a transition from information confirmation to information cascades as the number of followers increase. We find that highly disguised multiple‐broker packages exhibit higher market impact, higher long‐term returns and are associated with fewer followers. Our study also documents that lead fund managers face portfolio risk constraints in trading on private information. |
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ISSN: | 0810-5391 1467-629X |
DOI: | 10.1111/j.1467-629X.2010.00367.x |