Correlated Trading and Returns

61 Pages Posted: 5 Jun 2008

See all articles by Daniel Dorn

Daniel Dorn

Drexel University - Department of Finance

Gur Huberman

Columbia University - Columbia Business School, Finance

Paul Sengmueller

Tilburg University

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Abstract

A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders, do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.

Keywords: correlated trading

JEL Classification: G1

Suggested Citation

Dorn, Daniel and Huberman, Gur and Sengmueller, Paul F., Correlated Trading and Returns. CEPR Discussion Paper No. DP6530, Available at SSRN: https://ssrn.com/abstract=1140057

Daniel Dorn (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Gur Huberman

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-5553 (Phone)

Paul F. Sengmueller

Tilburg University ( email )

Department of Finance
Warandelaan 2
Tilburg, 5037 AB
Netherlands
+31 13 466 2318 (Phone)