Taking Sides on Return Predictability
48 Pages Posted: 20 Jul 2020
Date Written: June 28, 2020
We study how 9 different market participants trade with respect to 130 different stock return anomalies and how each participant’s trades predict returns. Retail investors trade against anomalies, while firms’ and short sellers’ trades agree with anomalies. Institutional portfolios are weighted against anomalies, although some institutions’ trades agree with anomalies after the anomaly-measurement date. Retail trades predict returns in the wrong direction, firms’ and short sellers’ trades predict returns in the intended direction, institutional trades do not robustly predict returns. The return-predictability of trades by retail investors, firms and short sellers can be either mostly or completely explained by anomalies.
Keywords: Anomalies, Retail investors, Institutional investors, Short sellers, Hedge funds
JEL Classification: G10, G11, G14, G23
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