Trading Aggressiveness and Market Efficiency

48 Pages Posted: 10 Nov 2015 Last revised: 15 Jan 2017

Olga Klein

University of Warwick - Warwick Business School

Date Written: January 14, 2017


Recent theory by Stein (2009) shows that too many arbitrageurs crowding into the same position can cause prices to overreact. To test Stein's theory empirically, this paper uses trading aggressiveness after earnings releases as a measure of arbitrage crowding. When an unexpectedly large number of arbitrageurs shows up, their high aggregate demand makes trade execution more difficult, and thus leads every individual arbitrageur to trade more aggressively. Therefore, high trading aggressiveness in post-announcement periods should reflect periods of arbitrage crowding, with many competing arbitrageurs trading in the news direction. Consistent with Stein's (2009) predictions, my findings suggest that prices of aggressively traded stocks indeed overreact, especially after announcements with stronger initial underreaction to the news.

Keywords: Trading Aggressiveness, Market Efficiency, Crowded Arbitrage, Intermarket Sweep Order, Earnings Announcement

JEL Classification: G14, G18, G19

Suggested Citation

Klein, Olga, Trading Aggressiveness and Market Efficiency (January 14, 2017). WBS Finance Group Research Paper. Available at SSRN: or

Olga Klein (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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