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
Date Written: July 30, 2021
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: Suggested Citation