Alpha Decay and Strategic Trading
60 Pages
Posted: 21 Mar 2015
Last revised: 1 Jun 2016
Inalytics Limited
London Business School
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:
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
