Slow Trading and Stock Return Predictability

AFA 2017 Chicago

51 Pages Posted: 10 Oct 2015 Last revised: 23 Oct 2017

Allaudeen Hameed

National University of Singapore (NUS) - Department of Finance

Matthijs Lof

Aalto University

Matti Suominen

Aalto University School of Business

Date Written: October 23, 2017

Abstract

The state of market returns positively predicts the size premium (or the difference in the return on small and large firms) as small stocks adjust to market returns with a delay and large firms revert following market returns. This predictability of the size premium is strongest when aggregate asset and funding liquidity is low and is linked to institutional and informational frictions that manifest as slow institutional trading in small stocks but swift trading in large stocks. For example, slow trading by mutual funds leads to predictable small stock returns in the direction of fund flows.

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 23, 2017). 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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