The More We Know, the Less We Agree: A Test of the Trading Horizon Heterogeneity Theory

The Financial Review, Forthcoming.

48 Pages Posted: 9 Dec 2020 Last revised: 2 Aug 2021

See all articles by Lili Dai

Lili Dai

University of New South Wales (UNSW)

Jerry T. Parwada

UNSW Business School; Financial Research Network (FIRN)

Donald W. Winchester

University of New South Wales, School of Banking and Finance

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: July 30, 2021

Abstract

We examine the Kondor theoretical explanation of an enduring puzzle: trading volumes and stock return volatility peak after the release of public information. Using a comprehensive data set of institutional holdings and earnings announcements, we find supporting evidence that the proportion of short-term investors is positively associated with post-announcement spikes in trading volume and return volatility. This finding survives in the identification test based on the annual reconstitutions of the Russell 1000 and 2000 indices. We show our results largely withstand several alternative explanations related to the constitution of institutional investors, informed trading, and heterogeneous beliefs.

Keywords: Higher-Order Expectations, Noisy Rational Expectations Model, Trading Volume, Public Information

JEL Classification: D82, D84, G12, G14

Suggested Citation

Dai, Lili and Parwada, Jerry T. and Winchester, Donald W. and Zhang, Bohui, The More We Know, the Less We Agree: A Test of the Trading Horizon Heterogeneity Theory (July 30, 2021). The Financial Review, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3735619 or http://dx.doi.org/10.2139/ssrn.3735619

Lili Dai (Contact Author)

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/ldaiprofile

Jerry T. Parwada

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

UNSW
Sydney, NSW 2052
Australia

HOME PAGE: http://www.firn.org.au

Donald W. Winchester

University of New South Wales, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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