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Trading aggressiveness and market efficiency

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  • Klein, Olga

Abstract

Stein (2009) shows that crowding by sophisticated traders can cause price overreaction. To test Stein's theory, in this paper I use trading aggressiveness after earnings releases as a measure of crowding. With a large number of traders, their strong aggregate demand makes trade execution more difficult, and leads every individual investor to trade more aggressively. I find that the prices of aggressively traded stocks overreact after good news, but not after bad news, except during the financial crisis. The asymmetry in observed results can be explained by differences in belief heterogeneity of investors and market attention during news releases.

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  • Klein, Olga, 2020. "Trading aggressiveness and market efficiency," Journal of Financial Markets, Elsevier, vol. 47(C).
    • Handle: RePEc:eee:finmar:v:47:y:2020:i:c:s1386418117302264
    DOI: 10.1016/j.finmar.2019.100515
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    Cited by:

    1. Chakrabarty, Bidisha & Moulton, Pamela C. & Wang, Xu (Frank), 2022. "Attention: How high-frequency trading improves price efficiency following earnings announcements," Journal of Financial Markets, Elsevier, vol. 57(C).
    2. Justin Cox, 2021. "ISO order imbalances and individual stock returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(1), pages 5-23, April.
    3. Chiou, Calvin J. & Zhou, Xiaozhou & Chan, Chang, 2022. "A taxonomy of individual liquidity provision: Evidence from the Taiwan stock exchange," Finance Research Letters, Elsevier, vol. 50(C).

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    More about this item

    Keywords

    Trading aggressiveness; Market efficiency; Crowded trading; Intermarket sweep order; Earnings announcement;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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