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Are institutions informed about news?

The Second International Moscow Finance Conference 2012. Are institutions informed about news?. T. Hendershott, D. Livdan, N. Sch ürhoff Discussed by: Sergey Gelman, ICEF, Higher School of Economics, Moscow. Summary (I). Since Kyle (1985): the role of an informed trader is crucial

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Are institutions informed about news?

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  1. The Second International Moscow Finance Conference 2012 Are institutions informed about news? T. Hendershott, D. Livdan, N. Schürhoff Discussed by: Sergey Gelman, ICEF, Higher School of Economics, Moscow

  2. Summary (I) • Since Kyle (1985): the role of an informed trader is crucial • Who is informed? • Mutual funds, Short sellers, Corporate insiders. • Are institutions informed? • Up to now: mixed evidence, based mainly on specific news • This paper: using a very comprehensive news sample YES!

  3. Summary (II) • Excellent lit review • A rich dataset: • returns and NYSE institutional trading data on 1667 stocks observed over 2003-2005 (756 trading days) • 126,438 days with news releases from Reuters NewsScope Sentiment Engine Results: • Institutional trading predicts news arrival • Institutional trading predicts news sentiment • Inst. trading predicts (news) returns • Inst. trading predicts earnings surprise

  4. Comments (I) • Causality issue: do institutions cause news or predict (have private info)? • Institutional demand drives prices (Choi, Sias 2012 RFS; Llorente et al. 2002 RFS, Baker and Warner 1993 JFE) • Institutional demand may drive news (indirect evidence: Barber et al. 2007 JFE) • Only in case of earnings surprises alternative causality stories can be majorly ruled out • Possible extension: include prediction of earnings surprise date returns • Possible extension: choose certain type of news, which can not be influenced by institutionals and returns (beside EA)

  5. Comments (II) • Economic significance: 10 b.p.: • small fraction of returns s.d. ≈200 b.p. • Institutions are better informed, but not “the informed” • smaller than transaction costs (average bid-ask spreads for S&P 500 stocks were 16 b.p. in 2002 -2011); • Do institutions trade on the information or just minimize their transaction costs? • High persistence of institutional order imbalance: • link to theoretical models • Splitting order effect, literature on the size of informed trade (Llorente et al. 2002 RFS): Return*volume

  6. Comments (III): Technical • Fixed effects cause problems in all panel equations, not only VAR (use Arellano-Bover (1995)) • Institutional fraction (Choi and Sias 2012 RFS) • Negative sign for volume • Institutionals seem to account for 50% to over 100% of the volume (??). Who is uninformed in the latter case? • Granger causality test instead of IRF • Persistence in sentiment: Effect of a news published several times in different media? • Surprising: simultaneous correlations in VAR low

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