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

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

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