Assistant Professor of Finance
London Business School
London, NW1 4SA
Office: Plowden 212
Link to Google Scholar Profile
This paper provides evidence that hedge funds and mutual funds neglect to properly condition on prices when trading on earnings announcements. This leads to predictable excess trading when many funds have similar signals, because they underestimate how much of their information is already incorporated into prices. Consistent with this excess trading causing temporary price impact, a portfolio long stocks that had excess selling and short stocks that had excess buying has an annualized Sharpe ratio near 1.0 after hedging exposure to common risk factors. Our findings are useful for understanding how asset prices are affected when a trader underestimates how many other investors follow similar investment strategies.
This study provides evidence that high-frequency traders (HFTs) identify patterns in past trades and orders that allow them to anticipate and trade ahead of other investors' order flow. Specifically, HFTs' aggressive purchases and sales lead those of other investors, and this effect is stronger at times when it is more difficult for non-HFTs to disguise their order flow. There is also persistence in which HFTs' trading predicts non-HFT order flow the best, indicating a subset of HFTs are either more skilled or more focused on anticipatory strategies. The results are not explained by HFTs reacting faster to news or past returns, by contrarian or trend-chasing behavior by non-HFTs, or by trader misclassification. These findings support the existence of an anticipatory trading channel through which HFTs increase non-HFT trading costs.
This article studies differences in the information content of 870,000 news announcements in 56 markets around the world. In most developed markets, a firm’s stock price moves much more on days with public news about the firm. In contrast, in many emerging markets volatility is similar on news and non-news days. We examine several hypotheses for our findings. Cross-country differences in stock price reactions are best explained by insider trading, followed by differences in the quality of the news dissemination mechanism. Our findings are useful for quantifying the extent of insider trading and how the financial media affects international markets.