Discontinued Positive Feedback Trading and the Decline of Return Predictability
We show that demand effects generated by institutional frictions can influence systematic return predictability patterns in stocks and mutual funds. Identification relies on a reform to the Morningstar rating system, which we show caused a structural break in style-level positive feedback trading by mutual funds. As a result, momentum-related factors in stocks, as well as performance persistence and the “dumb money effect” in mutual funds, experienced sharp decline. Consistent with the proposed channel, return predictability declined right after the reform, was limited to the U.S. market, and was concentrated in factors and mutual funds most exposed to the mechanism.
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Copy CitationItzhak Ben-David, Jiacui Li, Andrea Rossi, and Yang Song, "Discontinued Positive Feedback Trading and the Decline of Return Predictability," NBER Working Paper 28624 (2021), https://doi.org/10.3386/w28624.Download Citation
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Published Versions
Ben-David, Itzhak & Li, Jiacui & Rossi, Andrea & Song, Yang, 2024. "Discontinued Positive Feedback Trading and the Decline of Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(7), pages 3062-3100, November. citation courtesy of 
Itzhak Ben-David & Jiacui Li & Andrea Rossi & Yang Song, 2024. "Discontinued Positive Feedback Trading and the Decline of Return Predictability," Journal of Financial and Quantitative Analysis, vol 59(7), pages 3062-3100.
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