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Keywords:

  • municipal bond;
  • fund flows;
  • fund managers;
  • contrarian;
  • tax-loss selling
  • G11;
  • G20

Abstract

Examining municipal bond returns, bond fund flows and buying activities by fund managers over the period 1990–2009, we find evidence of tax calendar-related rational opportunistic trading patterns by fund investors and fund managers. Specifically, fund shareholders conduct tax-loss selling in December and re-invest in January. In April, June, and September, fund investors rationally cherry pick to sell their shares of short-term bond funds instead of their shares of long-term bond funds to raise cash to pay estimated taxes. Unlike fund shareholders, fund managers adopt a contrarian strategy of buying in December and selling in January.