Correlated Trading and Returns

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Correlated Trading and Returns

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1. Correlated Trading. and Returns. Daniel Dorn (Drexel U) Gur Huberman (Columbia U) ... To what extent are they on the same side of the market? ... – PowerPoint PPT presentation

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Title: Correlated Trading and Returns


1
Correlated Trading and Returns
  • Daniel Dorn (Drexel U)
  • Gur Huberman (Columbia U)
  • Paul Sengmueller (U of Amsterdam)

2
37,000 Clients of a Large German Discount Broker
in 1998-2000
  • To what extent are they on the same side of the
    market?
  • Stock returns when clients are on the same side
    of the market?
  • Stock returns subsequent to clients being on the
    same side of the market?

3
Lakonishok, Shleifer, Vishny
  • The impact of institutional trading on stock
    prices (JFE, 1992)
  • Data quarterly frequency.
  • Conclusion not much.
  • LSV herding measure

4
To what extent are they on the same side of the
market?
Median LSV measure
5
Stock returns when clients are on the same side
of the market?
  • When clients buy, returns positive
  • When clients sell, returns negative.

6
Stock returns after clients are on the same side
of the market?
  • After clients have bought, returns positive
  • After clients have sold, returns negative.

7
Importance of limit orders
  • If price goes up on a day
  • Mainly sell limit orders will be executed
  • Two effects
  • Exaggeration of correlated trading
  • Negative correlation between return direction
    of trading.

8
Half the trades are SPECULATIVE
9
Persistence of buyers ratios
10
Weekly returns of portfolios based on comovements
of speculative trades
11
Weekly returns of portfolios based on comovements
of NON-speculative trades
12
Correlated trading returns
  • At the weekly frequency,
  • Trading of these people is positively correlated
    with returns.
  • Speculative trading of these people leads
    subsequent returns.

13
Why contemporaneous correlation?
  • Same signals that cause price change also cause
    these people to trade in the same direction.
  • These peoples trades push prices.

14
Why speculative trading leads returns?
  • Speculators are good at predicting price changes.
  • These peoples trades push prices.
  • These peoples trades are persistent.