Short-Term Trading Skill: An Analysis of Investor Heterogeneity and Execution Quality
68 Pages Posted: 11 Jul 2014 Last revised: 9 Oct 2018
Date Written: August 1, 2018
We examine short-horizon return predictability using a novel proprietary dataset of institutional traders with known identities. We estimate investor-specific short-term trading skill and find that there is pronounced heterogeneity in predicting short-term returns among institutional investors. Incorporating short-term predictive ability, our model explains much higher fraction of variation in asset returns. Ignoring the heterogeneity in short-term trading skill can have major implications in modeling price impact. We uncover several stylized trading patterns of skilled trading: skilled investors choose larger trade sizes, avoid dark pools, trade fewer stocks on any given day, but they do not time high-liquidity periods.
Keywords: Short-term Return Predictability, Institutional Trading, Execution Quality, Algorithmic Trading
JEL Classification: G11, G14, G24
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