Slow Trading and Stock Return Predictability
AFA 2017 Chicago
51 Pages Posted: 10 Oct 2015 Last revised: 23 Oct 2017
Date Written: October 23, 2017
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: Suggested Citation