The Journal of Finance

Do Limit Orders Alter Inferences about Investor Performance and Behavior?

Published: 07/15/2010   |   DOI: 10.1111/j.1540-6261.2010.01576.x

JUHANI T. LINNAINMAA

Individual investors lose money around earnings announcements, experience poor posttrade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individual investors in Finland, I find that these trading patterns can be explained in large part by investors' use of limit orders. These patterns arise mechanically because limit orders are price‐contingent and suffer from adverse selection. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set's susceptibility to this limit order effect.

Reverse Survivorship Bias

Published: 02/07/2013   |   DOI: 10.1111/jofi.12030

JUHANI T. LINNAINMAA

Mutual funds often disappear following poor performance. When this poor performance is partly attributable to negative idiosyncratic shocks, funds' estimated alphas understate their true alphas. This paper estimates a structural model to correct for this bias. Although most funds still have negative alphas, they are not nearly as low as those suggested by the fund‐by‐fund regressions. Approximately 12% of funds have net four‐factor model alphas greater than 2% per year. All studies that run fund‐by‐fund regressions to draw inferences about the prevalence of skill among mutual fund managers are subject to reverse survivorship bias.

IQ and Stock Market Participation

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01701.x

MARK GRINBLATT, MATTI KELOHARJU, JUHANI LINNAINMAA

Stock market participation is monotonically related to IQ, controlling for wealth, income, age, and other demographic and occupational information. The high correlation between IQ and participation exists even among the affluent. Supplemental data from siblings, studied with an instrumental variables approach and regressions that control for family effects, demonstrate that IQ's influence on participation extends to females and does not arise from omitted familial and nonfamilial variables. High‐IQ investors are more likely to hold mutual funds and larger numbers of stocks, experience lower risk, and earn higher Sharpe ratios. We discuss implications for policy and finance research.

Factor Momentum and the Momentum Factor

Published: 04/07/2022   |   DOI: 10.1111/jofi.13131

SINA EHSANI, JUHANI T. LINNAINMAA

Momentum in individual stock returns relates to momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of six basis points following a year of losses and 51 basis points following a positive year. We find that factor momentum concentrates in factors that explain more of the cross section of returns and that it is not incidental to individual stock momentum: momentum‐neutral factors display more momentum. Momentum found in high‐eigenvalue principal component factors subsumes most forms of individual stock momentum. Our results suggest that momentum is not a distinct risk factor—it times other factors.

Asset Managers: Institutional Performance and Factor Exposures

Published: 04/15/2021   |   DOI: 10.1111/jofi.13026

JOSEPH GERAKOS, JUHANI T. LINNAINMAA, ADAIR MORSE

Using data on $18 trillion of assets under management, we show that actively managed institutional accounts outperformed strategy benchmarks by 75 (31) bps on a gross (net) basis during the period 2000 to 2012. Estimates from a Sharpe model imply that asset managers' outperformance came from factor exposures. If institutions had instead implemented mean‐variance efficient portfolios using index and institutional mutual funds available during the sample period, they would not have earned higher Sharpe ratios. Our results are consistent with the average asset manager having skill, managers competing for institutional capital, and institutions engaging in costly search to identify skilled managers.

Return Seasonalities

Published: 02/22/2016   |   DOI: 10.1111/jofi.12398

MATTI KELOHARJU, JUHANI T. LINNAINMAA, PETER NYBERG

A strategy that selects stocks based on their historical same‐calendar‐month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, and international stock market indices, as well as at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns. The correlations between different seasonality strategies are modest, suggesting that they emanate from different systematic factors. Our results suggest that seasonalities are not a distinct class of anomalies that requires an explanation of its own, but rather that they are intertwined with other return anomalies through shared systematic factors.

The Misguided Beliefs of Financial Advisors

Published: 11/28/2020   |   DOI: 10.1111/jofi.12995

JUHANI T. LINNAINMAA, BRIAN T. MELZER, ALESSANDRO PREVITERO

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Within a large sample of Canadian financial advisors and their clients, however, we show that advisors typically invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive and actively managed funds, and underdiversify. Advisors' net returns of −3% per year are similar to their clients' net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.

Retail Financial Advice: Does One Size Fit All?

Published: 04/12/2017   |   DOI: 10.1111/jofi.12514

STEPHEN FOERSTER, JUHANI T. LINNAINMAA, BRIAN T. MELZER, ALESSANDRO PREVITERO

Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, age, investment horizon, and financial sophistication. Advisor effects remain important even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one‐size‐fits‐all advice does not come cheap: advised portfolios cost 2.5% per year, or 1.5% more than life cycle funds.