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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 - PowerPoint PPT Presentation
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Are institutions informed about news?
T. Hendershott, D. Livdan, N. Schürhoff
Discussed by:Sergey Gelman, ICEF, Higher School of
Economics, Moscow
The Second International Moscow Finance Conference 2012
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!
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
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 outPossible 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)
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
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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