Information-Based Trading and Autocorrelation in Individual Stock Returns
56 Pages Posted: 17 Aug 2015
Date Written: July 5, 2015
Applying a recently developed approach, the paper estimates the daily arrival rates of buy and sell orders originated from different trading motives for each stock in a sample of NYSE-listed companies. Based on these arrival rates, it shows that stock return tends to continue on consecutive days when privately-informed trading prevails, leading to positive return autocorrelation. But return is more likely to reverse itself on days with continuous trading on dispersion in beliefs, leading return autocorrelation to be more negative. Contrarian trading strategies conditional on daily measures of investment disagreement can yield economically and statistically significant excess returns.
Keywords: Information-based trading, return autocorrelation, private information, dispersion in beliefs
JEL Classification: D82, G12, G14
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