Alpha Decay and Institutional Trading
58 Pages Posted: 21 Mar 2015 Last revised: 27 Jan 2022
Date Written: November 21, 2017
We document novel facts about the term structure of institutional trading and performance using transaction-level data on professional fund managers. New stock purchases earn positive risk-adjusted returns that decay gradually over the subsequent twelve months, and managers continue to buy the same stock in small increments for as long as the alpha remains positive, with proportional intensity. Greater competition for information and more highly correlated signals are associated with more aggressive trading and lower alpha. Our findings confirm many predictions of informed trading models, but also pose some new challenges for the theoretical literature.
Keywords: Strategic Trading, Heterogeneous Information, Institutional Investors
JEL Classification: G12, G14, G15, G23, D8
Suggested Citation: Suggested Citation