Slow Trading and Stock Return Predictability
AFA 2017 Chicago
45 Pages Posted: 10 Oct 2015 Last revised: 13 Oct 2018
Date Written: October 8, 2018
We provide evidence that institutions place lower trading priority and delay their trading in small, illiquid stocks. The slow trading of small stocks in turn delays the adjustment of small stock prices. In contrast, for large, liquid stocks, institutions demand immediacy, which generates some price pressure when there is heavy trading. These institutional trading frictions provides a mechanism to explain the slow diffusion of common information and lead-lag relation in size-based stock returns. Moreover, the liquidity induced slow institutional trading contributes to time-variation in the size premium, particularly following large market moves and heavy institutional trading.
Keywords: institutional trading, liquidity, return predictability, size premium
JEL Classification: G12, G23
Suggested Citation: Suggested Citation