Institutions, Individuals, and Return Autocorrelations
Richard W. Sias
University of Arizona - Department of Finance
Laura T. Starks
University of Texas at Austin - Department of Finance
This study examines serial correlation in daily portfolio returns for securities held primarily by individual investors versus securities held primarily by institutional investors. The results implicate institutional investors as the primary source of positive serial correlation in portfolio returns. Both own- and cross-autocorrelations are higher for the securities in which institutional investors play a greater role. The results are not consistent with pricing error corrections by market makers, non-synchronous trading or transaction costs as the major cause of the observed positive autocorrelations in daily portfolio returns. The results are most consistent with the autocorrelations being caused by the correlated trading patterns of institutional investors due to such activities as herding, momentum investing or other positive-feedback trading strategies.
JEL Classification: G1, G12working papers series
Date posted: September 2, 1999
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