An Empirical Study On The Stock Returns Based On Heterogeneous Beliefs Among Active-Managed Mutual Fund Managers

Information flows into the asset price by updating the expectation of the market participants. If the investors receive positive information about a given stock, the investors will buy this stock, and the stock price rises. The price will not stop rising until the return of the stock reaches to the return of the same risk assets. The traditional Asset Pricing Theory, such as the EMH and the CAPM, assumes the investors have the homogeneous beliefs.As the empirical study shows, the hypothesis of homogeneous beliefs will often be violated in the real market. The returns of the assets can not reflect the expectation of the investors with the market friction such as information asymmetry and short-sale constraints. In addition, the homogeneous beliefs can not help us to understand the financial anomalies.As a result, researchers began to study heterogeneous beliefs of the investors, and received corresponding results. Miller(1977) first put forward the hypothesis of heterogeneous beliefs, and found out that the heterogeneous beliefs is negatively related with the stock returns. Hong and Stein(2007) put forward the theory of source of the heterogeneous beliefs. Researchers empirically tested Miller’s theory with many proxies, and found the same result. But Choi, etc(2010), Jiang and Sun(2010) differentiate the effect of the heterogeneous beliefs of ordinary investors and the sophisticated investors. They argue that the heterogeneous beliefs of the active fund manager are positively related with the stock returns.This paper empirically tests the relations between heterogeneous beliefs of the active fund manager and the stock returns, and proposes investment advice based on the findings.This paper is organized as6parts. Section1is the introduction. Section2summaries the relevant literature. Section3details the construction of variable to describe the heterogeneous beliefs of fund managers. Section4introduces the sample and data. Section5presents the empirical findings. Section6concludes, and presents the future research directions.This paper finds out that firstly, the effect heterogeneous beliefs of fund manager have to the stock returns differs from the ordinary investors. After Carhart four factor risk adjustment, the portfolio of the top30%stocks outperforms the bottom30%by0.67%per month. And the risk of the portfolios is negative related with heterogeneous beliefs of the fund manager.Secondly, the excess returns of the portfolio with high heterogeneous beliefs is better than active funds after Carhart four factor risk adjustment. This paper presents an effective selection between portfolio investment and fund investment.Finally, the effect of the heterogeneous beliefs decreases1month after portfolio formation. After6month, the portfolio with high heterogeneous beliefs can not get excess returns. It can be interpreted that the information will be fully digest in the next6months.The key innovation of this paper lies in3points below:Firstly, selection of the research perspective. This paper emphasizes on heterogeneous beliefs of the fund manager. It’s a new proxy to investigate the effects of fund manager to the stock returns. Secondly, construction of the variable. This paper constructs a variable to reflect the heterogeneous beliefs of the fund managers based on the portfolios of active fund manager, and statistically tests this variable. Finally, this paper proposes investment advice on portfolio investment and fund investment. The investment in portfolio with high level of heterogeneous beliefs will outperform the active funds.Meanwhile, there are some regrets in this paper. Firstly, the data could not be fully obtained. It caused difficulties in construction of the variable and examination of the duration of heterogeneous beliefs. The result presented by this paper needs further empirical test. Secondly, the research period is special. The samples of the beginning2years were too small. It might cause effects to the empirical results.The further research direction of this paper lies in3points below:Firstly, this paper is based on a strong constraints of short-sale, which would be changed with the release of stock index futures and the margin trading. This impact needs to be considered and further investigated. Secondly, the proxy used by this paper is only one. Further research can consider to make contrast of different proxies to determine the effect of heterogeneous beliefs to stock returns. Finally, if the research condition is permitted, it is worthwhile examining the effect in different industries, to prove the theory put by this paper.