Alpha Decay

56 Pages Posted: 21 Mar 2015 Last revised: 22 Nov 2017

See all articles by Rick Di Mascio

Rick Di Mascio

Inalytics Limited

Anton Lines

Columbia Business School

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: November 21, 2017

Abstract

Using a novel sample of professional asset managers, we document positive incremental alpha on newly purchased stocks that decays over twelve months. While managers are successful forecasters at these short-to-medium horizons, their average holding period is substantially longer (2.2 years). Both slow alpha decay and the horizon mismatch can be explained by strategic trading behavior. Managers accumulate positions gradually and unwind gradually once the alpha has run out; they trade more aggressively when the number of competitors and/or correlation among information signals is high, and do not increase trade size after unexpected capital flows. Alphas are lower when competition/correlation increases.

Keywords: Forecasting, Strategic Trading, Price Formation, Institutional Investors

JEL Classification: G12, G14, G15, G23, D8

Suggested Citation

Di Mascio, Rick and Lines, Anton and Naik, Narayan Y., Alpha Decay (November 21, 2017). SFS Finance Cavalcade 2016; Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2580551 or http://dx.doi.org/10.2139/ssrn.2580551

Rick Di Mascio

Inalytics Limited ( email )

Croydon
United Kingdom

Anton Lines (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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