Correlated Trading and Returns
Drexel University - Department of Finance
Columbia Business School - Finance and Economics
CEPR Discussion Paper No. DP6530
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.
Number of Pages in PDF File: 61
Keywords: correlated trading
JEL Classification: G1working papers series
Date posted: June 5, 2008
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