Alpha Decay and Institutional Trading

58 Pages Posted: 21 Mar 2015 Last revised: 27 Jan 2022

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

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

Di Mascio, Rick and Lines, Anton and Naik, Narayan Y., Alpha Decay and Institutional Trading (November 21, 2017). 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 70008223 (Phone)

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