Mutual Fund Trades: Timing Sentiment and Managing Tracking Error Variance

58 Pages Posted: 19 Aug 2012

See all articles by Dominic Gasbarro

Dominic Gasbarro

Murdoch University

Grant Cullen

Murdoch University

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: August 18, 2012

Abstract

We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks’ sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.

Keywords: Sentiment betas, tracking error variance

JEL Classification: C13, G12, G20

Suggested Citation

Gasbarro, Dominic and Cullen, Grant Stewart and Monroe, Gary S. and Zumwalt, J. Kenton, Mutual Fund Trades: Timing Sentiment and Managing Tracking Error Variance (August 18, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2131655 or http://dx.doi.org/10.2139/ssrn.2131655

Dominic Gasbarro (Contact Author)

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

Grant Stewart Cullen

Murdoch University ( email )

Murdoch, WA 6150
Australia
618 9360 6026 (Phone)
618 9310 5004 (Fax)

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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