Trading behaviour and the performance of daily institutional trades

Abstract

Using a unique database of daily trading activity, the present study examines the ability of active Australian equity managers to earn superior risk-adjusted returns. We find evidence of superior trade performance, where performance is a function of stock size. Our findings indicate that active equity managers are able to successfully exploit private information more readily in stocks ranked 101-150 by market-cap, where the degree of analyst coverage, information flows and market efficiency are lower than for large-cap stocks. We also find evidence of manager specialization. Our evidence provides further support of the value of active investment management in Australian equities. Copyright The Authors Journal compilation (c) 2006 AFAANZ.

Segmentation algorithm for non-stationary compound Poisson processes

“…For strategic reasons traders attempt to keep the true size of their orders secret in order to minimize transaction cost and trade the order at a more favorable price (for a review of this problem, see [29]). Empirical evidence of a widespread practice of order splitting has been given in the empirical results of Refs [30,31,32,8,24]. More recently it has been shown more directly that order splitting is the main cause of the long memory of order flow [9].…”

Are active fund managers collectors of private information or fast interpreters of public information?

“…In contrast to traditional performance studies, recent studies take a different approach and examine either the performance of the individual stocks held in fund manager portfolios or the performance of their trades (see Grinblatt and Titman, 1989;Chan and Lakonishok, 1993;Daniel et al, 1997;Chen et al, 2000;Wermers, 2000;Pinnuck, 2003;Chiyachantana et al, 2004;Foster et al, 2005;Gallagher and Pinnuck, 2006;and Gallagher and Looi, 2006). All these studies argue that an examination of the performance of the stocks/trades held by fund managers enables a more powerful test of their stock selection abilities.…”

“…These variables are as follows. We include lagged stock returns, r, as Foster, Gallagher and Looi (2006) show that institutional trading is influenced by lagged stock returns. d is an indicator or dummy variable for each stock.…”

Investment manager skill in small-cap equities

“…In particular, Wermers' (2000) evidence for U.S. mutual funds provides support for the Grossman and Stiglitz (1980) informational efficiency equilibrium. Both and Gallagher and Looi (2006) document superior stock selection ability for active Australian equity managers. Specifically, Gallagher and Looi (2006) report that, on average, active Australian managed funds outperform passive benchmark portfolios and that managers' stock picking ability is stronger in stocks ranked 101-150 by market capitalization.…”

“…Both and Gallagher and Looi (2006) document superior stock selection ability for active Australian equity managers. Specifically, Gallagher and Looi (2006) report that, on average, active Australian managed funds outperform passive benchmark portfolios and that managers' stock picking ability is stronger in stocks ranked 101-150 by market capitalization. The opportunities for exploiting private information in these companies may be higher due to the fact that these stocks are less liquid, and analyst coverage is lower compared to larger stocks.…”