Institutional Trading and Price Momentum
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Type of Work24 pages
Citation of Original PublicationYu, J. (2008). Institutional Trading and Price Momentum. International Review of Finance, 8(1‐2), 81-102.
This paper aims to explore the effect of institutional trading on the two asymmetric phenomena found by Lee and Swaminathan (2000): (1) asymmetric price momentum: price momentum is more pronounced among high turnover stocks; (2) asymmetric return phenomenon: low turnover stocks tend to outperform high turnover stocks. Lee and Swaminathan use a “momentum life cycle” to explain the asymmetric momentum effect while attributing the asymmetric return phenomenon to the analysts’ overestimating (underestimating) the future profitability of high (low) turnover firms. However, it essentially needs trading activity to induce both of the above asymmetric results. Since institutional investors exhibit momentum trading pattern (Chan, Jegadeesh and Lakonishok, 1996; Grinblatt, Titman and Wermers, 1995; Sias and Starks, 1997) and the trading behavior of institutional investors may have large impact on the movement of stock prices (Lakonishok, Shleifer and Vishny, 1992; Wermers, 1999), institutional trading may be one of the major driving forces leading to both of the above asymmetric patterns. The empirical results show that, first of all, after controlling for the turnover, the price momentum is still more pronounced among stocks with higher institutional ownership, while high turnover stocks no longer exhibit pronounced momentum effect after controlling for the institutional ownership. Furthermore, stocks with higher institutional ownership have better return performance in any of the turnover groups. While low turnover stocks still outperform high turnover stocks after controlling for the institutional ownership level, for some winner stocks this is no longer true. The results suggest that the asymmetric momentum effect is not induced by stock’s turnover, but rather it is driven by institutional trading. Turnover is only a proxy for institutional trading. That is, turnover per se has no economic significance in such a momentum phenomenon.