Does program trading contribute to excess comovement of stock returns?

Mingyi Li, Xiangkang Yin and Jing Zhao

Journal of Empirical Finance, 2020, vol. 59, issue C, 257-277

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.

Keywords: Program trading; Habitat investing; Excess return comovement; Return reversal (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:59:y:2020:i:c:p:257-277

DOI: 10.1016/j.jempfin.2020.11.001

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