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Wisdom of crowds: Retail order imbalances and stock returns

elassowipo1

Just a guy
Sep 17, 2007
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Vice City
www.bloomberg.com
Interesting academic paper I just read.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1668706

Abstract:

We study the role of retail investors in stock pricing using uniquely extensive data on retail trades and firm newswires. We show that daily buy-sell imbalances in retail orders positively predict firms' returns at horizons up to 20 days and that predictability does not reverse at 60-day horizons. These return predictability findings apply to aggressive (market) and passive (limit) order types. Textual analysis of the newswires reveals that market order imbalances also predict the tone of news stories, but limit order imbalances do not. In contrast, limit orders benefit from daily return reversals, whereas market orders do not. Collectively, these findings suggest that retail market orders aggregate private information about firms' future cash flows, whereas retail limit orders provide liquidity to traders demanding immediate execution.
 
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