Slow Trading and Stock Return Predictability

AFA 2017 Chicago

45 Pages Posted: 10 Oct 2015 Last revised: 13 Oct 2018

See all articles by Allaudeen Hameed

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Matthijs Lof

Aalto University

Matti Suominen

Aalto University School of Business

Date Written: October 8, 2018

Abstract

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

Hameed, Allaudeen and Lof, Matthijs and Suominen, Matti, Slow Trading and Stock Return Predictability (October 8, 2018). AFA 2017 Chicago. Available at SSRN: https://ssrn.com/abstract=2671237 or http://dx.doi.org/10.2139/ssrn.2671237

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://www.bschool.nus.edu.sg/staff_profile/cv.asp?ID=3

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

HOME PAGE: http://sites.google.com/site/matthijslof/

Matti Suominen

Aalto University School of Business ( email )

PO Box 1210
FI-00101 Helsinki
Finland
+358-50-5245678 (Phone)

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