Predicted Institutional Trades and the Cross-Section of Returns
58 Pages Posted: 2 Sep 2015 Last revised: 3 Sep 2017
Date Written: August 31, 2017
Abstract
The predicted trades of financial institutions contain information about future returns that is not already contained in their prior trades, prior or expected mutual fund trades, or a wide variety of other common financial characteristics. The power of predicted institutional trades to forecast returns is the result of financial institutions herding based on changes in firm profitability; however, this predictive power remains even after simultaneously controlling for firm profitability and prior institutional trades. A high-low portfolio constructed on predicted institutional trades earns an annualized Carhart alpha of 5.9%. Within liquid stocks, this portfolio earns an alpha of 10.2%.
Keywords: anomalies, empirical asset pricing, financial institutions; herding; institutional demand; institutional ownership; institutional demand; market efficiency; profitable trading strategies; short sale constraints
JEL Classification: G00; G1; G10; G12; G14; G18; G2; G20; G21; G22; G23; G24; G28
Suggested Citation: Suggested Citation