Emory University, Goizueta Business School

Emory University, Goizueta Business School Emory University, Goizueta Business School

1300 Clifton Road, Atlanta, 30322, GA, US

Increased trading activity and declining returns

Increased trading activity and declining returns 2018-07-25
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Tarun Chordia

Improved trading technologies are changing the markets, facilitating the boom in algorithmic trading and the growth of hedge funds. Liquidity and trading volume continue to hit record levels. In a research study, Tarun Chordia, R. Howard Dobbs Professor of Finance, and coauthors Avanidhar Subrahmanyam (UCLA) and Tong Qing (Singapore Management U) analyzed whether or not increased liquidity and the trading activity of hedge funds has had an impact on financial market anomalies. Anomalies are return patterns that are inconsistent with the basic risk-return paradigm of finance. Increased arbitrage is a possible factor in attenuating the impact of anomalies, including momentum, reversals, accruals, etc. To find the link, Chordia and his coauthors studied proxies for arbitrage trading, including “the impact of the decline in the tick size due to decimalization and the impact of hedge fund assets under management, short interest, and share turnover.” The researchers referenced a wide sampling of equity market anomalies for more than three decades to show that increased liquidity and hedge fund trading activity did ultimately result in the decrease of the “economic and statistical significance of these anomalies.”

Source:
www.semanticscholar.org

Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?

We examine whether the recent regime of increased liquidity and trading activity is associated with attenuation of prominent equity return anomalies due to increased arbitrage.

www.semanticscholar.org