Trading Opportunities and the Portfolio Choice of Institutional Investors

66 Pages Posted: 9 Sep 2019 Last revised: 7 Feb 2021

See all articles by Terry Zhang

Terry Zhang

Australian National University (ANU)

Date Written: February 5, 2021

Abstract

This paper studies the portfolio choice of institutional investors with short holding horizons. Theoretically, only short-horizon institutions can routinely profit from the temporary mispricing of a stock. Stocks that are more susceptible to temporary mispricing attract more demand from short-horizon institutions, which in turn increases the average price of these stocks and drives out demand from other investors. Empirically, I find that stocks held more by short-horizon institutions have lower expected returns and provide more short-term trading opportunities, as my model predicts. My results demonstrate how institutional investors with different holding horizons allocate their capital and affect stock returns.

Keywords: institutional investor, investment horizon, mispricing, performance

JEL Classification: G11, G12, G14

Suggested Citation

Zhang, Terry, Trading Opportunities and the Portfolio Choice of Institutional Investors (February 5, 2021). Available at SSRN: https://ssrn.com/abstract=3444673 or http://dx.doi.org/10.2139/ssrn.3444673

Terry Zhang (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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