NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Pengjie Gao

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Working Papers

December 2008Informed Trading, Liquidity Provision, and Stock Selection by Mutual Funds
with Zhi Da, Ravi Jagannathan: w14609
We show that a mutual fund's "stock selection skill" computed using the Daniel, Grinblatt, Titman and Wermers (1997) procedure can be decomposed into additional components that include impatient "informed trading" and "liquidity provision," thereby helping us understand how a fund creates value. We validate our method by verifying that liquidity provision is the dominant component of selection skill for Dimensional Fund Advisors U.S. Micro Cap fund, as observed by Keim (1999). Index funds lose on liquidity absorbing trades, since they pay the price impact on trades triggered by index rebalancing, inflows and redemptions. Consistent with the view that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information events, ...

Published: Da, Zhi, Re-Jin Guo and Ravi Jagannathan. 2012. CAPM for Estimating the Cost of Equity Capital: Interpreting the Empirical Evidence. Journal of Financial Economics. 103(1): 204-220.

November 2007When Does a Mutual Fund's Trade Reveal its Skill?
with Zhi Da, Ravi Jagannathan: w13625
We conjecture that a mutual fund manager with superior stock selection ability is more likely to benefit from trading in stocks affected by information-events. Taking the probability of informed trading (PIN, Easley, Kiefer, O'Hara, and Paperman, 1996) to measure the amount of informed trading in a stock, and inferring mutual fund trades from a large sample of mutual fund holdings, we provide empirical support for the conjecture. Funds trading high-PIN stocks exhibit superior performance on average, and superior performance that is more likely to persist. The findings are not due to price momentum or the higher returns earned by high-PIN stocks on average. Conclusions remain the same after testing for alternative measures for the amount of informed trading. Decomposing a fund's stock selec...

Published: “Impatient Trading, Liquidity Provision, and Stoc k Selection by Mutual Funds” (with Pengjie Gao and Ravi Jagannathan), Review of Financial Studies , Vol 24, 675-720 (2011)

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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