Abstract
We link a seemingly biased trading behavior to equilibrium asset prices. 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 find 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 significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This return predictability is difficult to reconcile with alternative explanations.
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