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Does program trading contribute to excess comovement of stock returns?

Author

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  • Li, Mingyi
  • Yin, Xiangkang
  • Zhao, Jing

Abstract

Daily returns of stocks with high program trading comove more with each other but less with others. This significant comovement is disconnected with market movements and news of fundamentals and becomes stronger when market uncertainty is higher. It can be explained by neither the hypotheses of gradual information diffusion and liquidity provision nor the effects of quantitative trading signals, earnings announcements and index fund trading. Its non-fundamental nature is further demonstrated by the observation of program trading stimulating return reversals. Underlying this comovement is the high persistence of program trading. Our findings support the theory of habitat investing and demonstrate program trading creates a distinct source of excess return comovement.

Suggested Citation

  • Li, Mingyi & Yin, Xiangkang & Zhao, Jing, 2020. "Does program trading contribute to excess comovement of stock returns?," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 257-277.
    • Handle: RePEc:eee:empfin:v:59:y:2020:i:c:p:257-277
    DOI: 10.1016/j.jempfin.2020.11.001
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    More about this item

    Keywords

    Program trading; Habitat investing; Excess return comovement; Return reversal;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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