Date: 19 April 2024, Friday
Time: 13.30 – 14.30
This is an online seminar. To obtain event details please send a message to department.
“Inferring Mutual Fund Intra-Quarter Trading
An Application to ESG Window Dressing”
by
Dong Lou
London School of Economics
Abstract
We develop a novel method to infer intra-quarter trading of individual mutual funds. Although mutual funds report their holdings once every quarter, they are required to report their portfolio returns every day. After a mutual fund executes a trade, its reported portfolio returns further deviate from its quarter-end-holdings-based returns (assuming no trading).This sudden jump in return deviation allows us to infer the transaction date and amount.We apply our method to studying strategic trading of ESG stocks by mutual funds aroundquarter ends. Our evidence suggests that in recent years, mutual funds buy high-ESG stocksand sell low-ESG stocks right before quarter ends, and reverse their trades at the beginning of the next quarter. This trading pattern is concentrated among mutual funds right around the cutoff of four and five ESG rating stars, which have the strongest incentives to boost ESG performance. These trades also affect prices: high-ESG stocks outperform low-ESG stocks right before quarter ends, and underperform at the beginning of the next quarter.
Bio
Dong Lou is a Professor of Finance at the London School of Economics, a Research Fellow at the Centre for Economic Policy Research, and an Academic Consultant and Visitor to the Bank of England. He is an Associate Editor of the Journal of Finance, Journal of Financial Economics, and Management Science. Professor Lou teaches in the Master’s, Executive Education, and Doctoral Programs at the London School of Economics.
Professor Lou frequently advises government organizations and regularly consults for investment management companies. His research has been published in top academic journals, has won many awards, and is frequently profiled in financial media outlets including the Wall Street Journal, Forbes, and Bloomberg. His main research areas include asset pricing, investment management, behavioral finance, and the Chinese financial markets. Professor Lou received a PhD in Financial Economics from Yale University in 2009 and an undergraduate degree in Computer Science from Columbia University in 2004 (https://personal.lse.ac.uk/loud).