Investor heterogeneity and asymmetric volatility under short-sale constraints: Evidence from Korean fund market

We analyze the asymmetric behavior of fund managers with short-selling constraints under different market conditions to confirm the hypothesis of difference of opinion of fund managers and also investigate determinants in difference of opinions in fund market. This paper examines two issues: whether there exists the difference of opinions of fund managers and whether there is asymmetric volatility under short-sale constraints. Under short-sale constraints, we implement testing the hypothesis of difference of opinion found by Chen, Hong, and Stein (2001) and Hong and Stein (2003). This hypothesis provides a unique opportunity to test directly the differences of opinion among fund managers that operate under short-sale constraints using asset-allocating strategies. The test results provide evidence that there is asymmetric volatility and increased differences of opinion among fund managers. Furthermore, the results of this study are consistent with the model of Hong and Stein (2003), which predicts that negative asymmetries are more likely to occur when there are large differences of opinions among fund managers. Therefore, our results imply that the overvaluation effect is more remarkable in funds for which a wider dispersion of the opinions of fund managers exists. These findings are consistent with Miller’s (1977) intuition and Hong and Stein’s (2003) model. In addition, our results also support the stochastic bubble hypothesis and are consistent with Blanchard and Watson (1982) and Wu (1997), even after controlling for fund characteristic variables.