Overselling Winners and Losers: How Mutual Fund Managers’ Trading Behavior Affects Asset Prices

We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we nd that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized prots from such funds have stronger return predictability. This cross-sectional return predictability is dicult to reconcile with alternative explanations.