Mutual Fund Trading around the World, Do Information Environments Matter?

• Main Authors: ZHANG, Zhe (Joe), LAI, Sandy, Ng, Lilian, ZHANG, Bohui
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Domestic and Foreign Mutual Funds Holdings; Trading strategies; and PIN; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1412
• Institution: Singapore Management University

This paper provides an extensive analysis of the trading strategies of 19,639 domestic mutual funds from 28 countries worldwide and of their 125,357 foreign counterparts that invest in their home markets for the period 1999 to 2005. Results show strong evidence that information environments matter for fund investment decisions. We show worldwide evidence that domestic mutual funds and especially foreign funds act as momentum traders when they buy stocks and as contrarians when they sell. A closer analysis indicates that foreign funds tend to actively pursue more momentum investing than domestic funds when buying stocks in firms and countries with low information environments, suggesting asymmetric information between the two groups of funds. Furthermore, the trading strategies of domestic funds have stronger predictive power for future returns than the strategies of foreign funds. The overall evidence clearly suggests that foreign funds are at an informational disadvantage.