DP6530 Correlated Trading and Returns

Author(s): Daniel Dorn, Gur Huberman, Paul Sengmüller
Publication Date: October 2007
Keyword(s): correlated trading
JEL(s): G1
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6530

A German broker?s clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders, do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.