Do short-term institutions exploit stock return anomalies?

Yinfei Chen, Wei Huang, George J. Jiang

Research output: Contribution to journalReview articlepeer-review

5 Scopus citations

Abstract

The literature documentsthat institutional investors in aggregate trade in the “wrong” direction of stock return anomalies. This paper explains the puzzle by isolating active institutions with a shorter-term investment horizon (“short-term institutions”). Based on 10 well-known stock return anomalies, we find that these short-term institutions indeed exploit anomalies. The results established in the literature are mostly driven by institutions with a longer-term investment horizon, who are likely more interested in long-run financial performance. In addition, given that institutional investors are momentum traders, we examine separately how institutional investors trade on momentum and contrarian anomalies. We show that institutions generally trade in the right direction on momentum anomalies but wrong direction on contrarian anomalies. However, over relatively short trading windows, short-term institutions trade in the right direction of both momentum and contrarian anomalies. Furthermore, we show evidence that when short-term institutions exploit anomalies, their trades generate significantly positive abnormal returns. Our results also imply that trading by short-term institutions appears to be subject to liquidity provision by long-term institutions.

Original languageEnglish (US)
Pages (from-to)69-94
Number of pages26
JournalFinancial Review
Volume57
Issue number1
DOIs
StatePublished - Feb 2022
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2021 The Eastern Finance Association

Fingerprint

Dive into the research topics of 'Do short-term institutions exploit stock return anomalies?'. Together they form a unique fingerprint.

Cite this