Advice-Driven Demand and Systematic Price Fluctuations

65 Pages Posted: 16 Nov 2020 Last revised: 16 Apr 2021

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Jiacui Li

David Eccles School of Business, University of Utah

Andrea Rossi

University of Arizona - Department of Finance

Yang Song

University of Washington - Michael G. Foster School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: November 2020

Abstract

We show that advice in the form of mutual fund ratings generates correlated demand that creates systematic price fluctuations. Mutual fund investors chase fund performance via Morningstar ratings. Until June 2002, funds pursuing the same investment style had highly correlated ratings. Therefore, rating-chasing investors directed capital into winning styles, generating style-level price pressures that reverted over time. In June 2002, Morningstar reformed its methodology to equalize ratings across styles. Style-level correlated demand via mutual funds immediately became muted, significantly altering the time-series and cross-sectional variation of style returns. Advice-driven demand also explains substantial variation in the size and value factors.

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Suggested Citation

Ben-David, Itzhak and Li, Jiacui and Rossi, Andrea and Song, Yang, Advice-Driven Demand and Systematic Price Fluctuations (November 2020). NBER Working Paper No. w28103, Available at SSRN: https://ssrn.com/abstract=3731273

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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Jiacui Li

David Eccles School of Business, University of Utah ( email )

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Andrea Rossi

University of Arizona - Department of Finance ( email )

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Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
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United States

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