When is Money Likely to Be Smart? Evidence from Mutual Fund Investors in Taiwan

Investment Analysts Journal, No. 73, pp. 13-25, 2011

34 Pages Posted: 27 Feb 2011 Last revised: 5 Jan 2015

See all articles by Chi-Lu (Edward) Peng

Chi-Lu (Edward) Peng

Chung Hua University - Department of Finance; National Sun Yat-sen University

Miao-Ling Chen

National Sun Yat-sen University

So-De Shyu

National Sun Yat-Sen University

An-Pin Wei

Sun Yat-Sen University (SYSU) - International School of Business and Finance (ISBE)

Date Written: January 31, 2010

Abstract

Past behavioral research has provided evidence that fund investors have the ability to predict fund performance, called the smart money effect. In this study we examine whether the smart money effect exists in the Taiwanese mutual fund market. Specifically, we investigate whether the smart money effect appears across UP and DOWN markets and whether this effect persists over time. Consistent with the literature, we find that the smart money effect exists over our sample period. Moreover, after categorizing the market states as either UP or DOWN markets, our evidence shows a significant smart money effect only following DOWN markets but not following UP markets. According to behavioral theories, bad market states evoke negative affective states in investors, so negatively affected investors may rely less on the use of heuristics and become more careful and logical in their investment decisions. This paper infers that the existence of a smart money effect after DOWN markets occurs because investors in negative emotional states are likely to use more detailed information processing in their decision-making.

Keywords: The Smart Money Effect, Behavioral Theory, Carhart Four-Factor Alpha, Market States

Suggested Citation

Peng, Chi-Lu and Chen, Miao-Ling and Shyu, So-De and Wei, An-Pin, When is Money Likely to Be Smart? Evidence from Mutual Fund Investors in Taiwan (January 31, 2010). Investment Analysts Journal, No. 73, pp. 13-25, 2011, Available at SSRN: https://ssrn.com/abstract=1545262

Chi-Lu Peng (Contact Author)

Chung Hua University - Department of Finance ( email )

No. 707, Sec. 2, WuFu Road
Hsinchu, Taiwan 300
Taiwan

National Sun Yat-sen University ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

Miao-Ling Chen

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743
Taiwan

So-De Shyu

National Sun Yat-Sen University ( email )

No.70, Lianhai Rd., Gushan District,
Kaohsiung City
Taiwan

An-Pin Wei

Sun Yat-Sen University (SYSU) - International School of Business and Finance (ISBE) ( email )

China

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