Taking Sides on Return Predictability

54 Pages Posted: 20 Jul 2020 Last revised: 22 Feb 2022

See all articles by R. David McLean

R. David McLean

Georgetown University - Department of Finance

Jeffrey Pontiff

Boston College - Department of Finance

Christopher Reilly

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: June 28, 2020

Abstract

We provide the most comprehensive study of market participation to date. We assess the informativeness of 9 different participants’ trades, and how each participant’s trades relate to 130 different variables that together reflect the cross-section of expected stock returns. Firms and short sellers tend to be the smart money—both sell stocks with low expected returns, and their trades predict returns in the intended direction. Firms, however, also seem to possess private information, while short sellers do not. Retail investors buy (sell) stocks with low (high) expected returns and their trades predict returns opposite to the intended direction. All 6 types of institutional investors are weighted towards stocks with low expected returns, but none of their trades robustly predict returns.

Keywords: Anomalies, Retail investors, Institutional investors, Short sellers, Hedge funds

JEL Classification: G10, G11, G14, G23

Suggested Citation

McLean, R. David and Pontiff, Jeffrey and Reilly, Christopher, Taking Sides on Return Predictability (June 28, 2020). Available at SSRN: https://ssrn.com/abstract=3637649 or http://dx.doi.org/10.2139/ssrn.3637649

R. David McLean (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

Jeffrey Pontiff

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Christopher Reilly

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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