Jeffrey A. Busse

Market efficiency in real time

The Morning Call and Midday Call segments on CNBC TV provide a unique opportunity to study the efficient market hypothesis. The segments report analysts’ views about individual stocks and are broadcast when the market is open. We find that prices respond to reports within seconds of initial mention, with positive reports fully incorporated within one minute. Trading intensity doubles in the first minute, with a significant increase in buyer(seller-) initiated trades after positive (negative) reports. Traders who execute within 15 seconds of the initial mention make small but significant profits by trading on positive reports during the Midday Call. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G14

Tick Size and Institutional Trading Costs: Evidence from Mutual Funds

This paper measures changes in mutual fund trading costs following two reductions in the tick size of U.S. equity markets: the switch from eighths to sixteenths and the subsequent switch to decimals. We estimate trading costs by comparing a mutual funds daily returns to the daily returns of a synthetic benchmark portfolio that matches the funds holdings but has zero trading costs by construction. We find that the average change in trading costs of actively managed funds was positive following both reductions in tick size with a larger and statistically significant increase following decimalization. In contrast, index fund trading costs were unaffected.

Double-Adjusted Mutual Fund Performance

We develop a new approach for estimating mutual fund performance that controls for both factor model betas and stock characteristics in one measure. Our procedure shows that fund returns are significantly related to stock characteristics in the cross section after controlling for risk via factor models. The new measure substantially affects performance rankings, with a quarter of funds experiencing a change in percentile ranking greater than ten. Double-adjusted fund performance significantly predicts four-factor alpha, whereas the performance attributable to characteristics does not. Moreover, inference based on the new measure often differs, sometimes dramatically, from that based on traditional performance estimates.

Mutual Fund Trading Costs

Larger mutual funds underperform their smaller counterparts due to their holdings and not due to higher transaction costs. Using a sample of actual fund trades combined with fund portfolio holdings we find that larger funds experience lower percentage transaction costs than smaller funds. Further, smaller funds hold smaller market capitalization stocks and, to a lesser extent, stocks with greater book-to-market ratios and higher momentum. It is these characteristics, especially the market capitalization of stock holdings that account for diseconomies of scale in the mutual fund industry.We study the interdependencies between transaction costs, portfolio characteristics, and mutual fund performance. Using a novel data set of actual mutual fund trades, we find that, controlling for ...

Trading regularity and fund performance

In sharp contrast to prior findings on the trading performance of individual investors, we find a strong positive relation between trade frequency and performance among a large sample of institutional investors. The positive performance of institutional traders that trade actively persists for at least a year, as they continue to trade actively and generate abnormal returns from their trades. Large funds, however, are unable to overcome the transaction costs associated with their larger trades, a finding that lends insight into the decreasing returns to scale that characterizes the money management industry. Active traders generate performance both by supplying liquidity and by trading aggressively on information.