Alpha Decay
SFS Finance Cavalcade 2016
56 Pages Posted: 21 Mar 2015 Last revised: 22 Nov 2017
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: Suggested Citation
