FIN-03-035

Informationless Trading

November 2003

Stephen J. Brown, David R. Gallagher, Onno Steenbeek and Peter L. Swan

ABSTRACT
The recent paper by Goetzmann et al. (2002) suggests that fund managers subject to a performance review have an adverse incentive to engage in informationless trades that have the unfortunate attribute that they can expose the fund investor to significant downside risk. We examine this conjecture using a unique database of daily transactions and holdings by a set of thirty five successful Australian equity managers. We find that while close to a majority of funds earn excess returns that cannot be attributed to this type of trading, there remains a small minority of successful traders whose returns and pattern of transactions cannot be distinguished from those of an informationless trader in this market.
JEL Classification: G23

Stephen J. Brown
Institution: Professor of Finance, Leonard N. Stern School of Business, New York University
Telephone: 212-998-0300
Email: sbrown@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~sbrown

David R. Gallagher
Institution: School of Banking and Finance, The University of New South Wales, Sydney, NSW, 2052

Onno Steenbeek
Institution: Erasmus University and ABP Netherlands

Peter L. Swan
Institution: School of Banking and Finance, The University of New South Wales, Sydney, NSW, 2052

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