Sidelined Investors, Trading-Generated News, and Security Returns

Dice Working Paper No. 2000-2

45 Pages Posted: 10 Jul 2001

See all articles by H. Henry Cao

H. Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Date Written: August 2001

Abstract

This paper studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, 'sidelined' investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to 1) negative skewness following price runups and positive skewness following price rundowns (even though the model is ex ante symmetric), 2) a lack of correspondence between large price changes and the arrival of external information, and 3) increases in volatility following large price changes.

JEL Classification: N2, G1, G14, D82, G12, G19, Z10

Suggested Citation

Cao, Huining Henry and Coval, Joshua D. and Hirshleifer, David A., Sidelined Investors, Trading-Generated News, and Security Returns (August 2001). Dice Working Paper No. 2000-2. Available at SSRN: https://ssrn.com/abstract=269950 or http://dx.doi.org/10.2139/ssrn.269950

Huining Henry Cao

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Joshua D. Coval

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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