Alpha Decay and Strategic Trading

60 Pages Posted: 21 Mar 2015 Last revised: 1 Jun 2016

Rick Di Mascio

Inalytics Limited

Anton Lines

London Business School

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: May 31, 2016

Abstract

Stocks purchased by institutional investors earn significant positive alpha that declines gradually over twelve months. Using a comprehensive new dataset of daily trades, we find that purchases predict alpha even after controlling for stock characteristics. Observed trading behaviour suggests that fund managers act strategically to minimize information leakage, consistent with Kyle-type models — managers build positions in small increments proportional to remaining alpha, 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. Alpha is negatively related to competition/correlation, also consistent with the strategic trading hypothesis.

Keywords: Private Information, Price Formation, Trading Behaviour, Institutional Investors

JEL Classification: G12, G14, G15, G23

Suggested Citation

Di Mascio, Rick and Lines, Anton and Naik, Narayan Y., Alpha Decay and Strategic Trading (May 31, 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)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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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