Market-Wide Price Pressures, Excess Comovement, and a Transient Factor in Stock Returns

Abstract:     
In our asymmetric-information asset pricing model, commonality in uninformed trading translates into a transient factor in returns. The factor is capable of simultaneously producing negative signs of return cross-autocorrelations, a feature that we document in data, and excess comovement in returns. We also estimate informational frictions in the cross-section of stock returns and show that the transient friction (time needed for temporary price pressures to disappear) increases in rm size. Further analysis shows that transient frictions are higher for stocks more heavily traded by passive-style institutional investors and that stocks of larger companies are more subject to such persistent trading.

Number of Pages in PDF File: 65

working papers series