An Institutional Theory of Momentum and Reversal

Vayanos, Dimitri; Woolley, Paul

doi:10.3386/w14523

Cited by 135 publications

(100 citation statements)

References 56 publications

(22 reference statements)

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“…A growing literature suggests that institutional investment flows influence asset prices (e.g., Harris and Gruel (1986), Coval and Stafford (2007), Boyer (2008), He and Krishnamurthy (2008), Lou (2008), Vayanos and Woolley (2008)). We postulate that systematic trading and institutional fund flows lead to predictable patterns, not only in trading volume and order imbalances, but also in returns of common stocks.…”

Section: Discussionmentioning

confidence: 99%

Intraday Patterns in the Cross-Section of Stock Returns

2010

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Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross-section of stock returns. We find a striking pattern of return continuation at half-hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid-ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short-term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid-ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread.

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Section: Discussionmentioning

confidence: 99%

Intraday Patterns in the Cross-Section of Stock Returns

2010

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“…Our paper is also related to the literature on financial markets with intermediaries. In the usual setup, only intermediaries participate in asset markets, and they trade assets on behalf of consumers or outside investors (e.g., Shleifer and Vishny (), Gromb and Vayanos (), Allen and Gale (), Brunnermeier and Pedersen (), He and Krishnamurthy (, ), Vayanos and Woolley (), Dow and Han ()). The difference in the objectives of intermediaries and delegating investors, which is often endogenously determined in the model, generates mispricing or shock amplification in asset prices.…”

Section: Literature Reviewmentioning

confidence: 99%

The Paradox of Financial Fire Sales: The Role of Arbitrage Capital in Determining Liquidity

Dow¹,

Han

2017

The Journal of Finance

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How can fire sales for financial assets happen when the economy contains wellcapitalized but nonspecialist investors? Our explanation combines rational expectations equilibrium and "lemons" models. When specialist (informed) market participants are liquidity-constrained, prices become less informative. This creates an adverse selection problem, decreasing the supply of high-quality assets, and lowering valuations by nonspecialist (uninformed) investors, who become unwilling to supply capital to support the price. In normal times, arbitrage capital can "multiply" itself by making uninformed capital function as informed capital, but in a crisis, this stabilizing mechanism fails. IN A FIRE SALE, SELLERS ARE FORCED TO SELL assets at deep discounts because no one is willing to buy them at fair prices. Sellers can be forced to sell because of financial distress, credit market frictions, regulation, margin calls, etc. 1 Why do fire sales happen? What makes investors avoid buying assets that are apparently cheap? One explanation is offered by Shleifer and Vishny (1992): if industry experts with higher private valuations do not have enough liquidity, assets are bought at a discount by nonexperts who cannot use them efficiently. This argument applies naturally to real assets rather than financial securities. But since financial securities typically require that the holder only collects cash flows, not operates the assets, there should not be significant differences in private valuations. 2

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“…For example, in Kodres and Pritsker (2002), uninformed traders may not be able to see that the information is only about idiosyncratic shocks and are only able to infer information from observing equilibrium prices; their trades can then lead to comovement in asset prices. Another possible mechanism considered by Vayanos and Woolley (2013) is that flows of a managed fund can lead to return comovement of assets held by the funds.…”

Section: Model and Empirical Hypothesesmentioning

confidence: 99%

Communication and Comovement: Evidence from Online Stock Forums

Jiang¹,

Liu²,

Yang³

2018

Financial Management

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We study investor communication and stock comovement using a novel data set from an active online stock forum in China. We find substantial comovement among the returns of a stock and its “related stocks,” which are frequently discussed in the subforum dedicated to the given stock. Comovement is greater when the discussion of related stocks is more intensive. Further, the effect of communication on comovement is stronger for stocks associated with higher information uncertainty. Codiscussed stocks are more actively traded and experience more correlated trading. A trading strategy that exploits communication‐driven comovement generates abnormal returns. Our findings highlight the impact of investor communication on asset comovement.

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An Institutional Theory of Momentum and Reversal

Cited by 135 publications

References 56 publications

Intraday Patterns in the Cross-Section of Stock Returns

Intraday Patterns in the Cross-Section of Stock Returns

The Paradox of Financial Fire Sales: The Role of Arbitrage Capital in Determining Liquidity

Communication and Comovement: Evidence from Online Stock Forums

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