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The Information in Industry-Neutral Self-Financed Trades

Published online by Cambridge University Press:  14 February 2023

Yashar H. Barardehi ,
Zhi Da  and
Mitch Warachka Open the ORCID record for Mitch Warachka [Opens in a new window]
Yashar H. Barardehi
Affiliation:
Chapman University Argyros School of Business and Economics, Securities and Exchange Commission [email protected]
Zhi Da
Affiliation:
University of Notre Dame Mendoza College of Business [email protected]
Mitch Warachka*
Affiliation:
Chapman University Argyros School of Business and Economics
*
[email protected] (corresponding author)
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Abstract

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We identify Industry-Neutral Self-Financed Informed Trading (INSFIT) as stock trades financed by offsetting, equivalent dollar-denominated stock trades in the same industry. Approximately 37% of short-term mutual fund trading profits can be attributed to these trade pairs. Consistent with informed trading, INSFIT precedes unusually high media coverage for the underlying stocks. The trades underlying INSFIT are also larger as the release of stock-level news becomes more imminent. Both relative valuation and the hedging of industry exposure motivate INSFIT’s industry neutrality. While INSFIT positively impacts fund performance, active fund managers who execute INSFIT more aggressively obtain smaller trading profits per execution.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 796 - 829
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for the comments received from an anonymous referee, Amber Anand, Dan Bernhardt, Peter Chung, Shaun Davies, Mike Dong, Slava Fos (discussant), Thierry Foucault (the editor), Jean Helwege, Vahid Irani, Yawen Jiao, Tim Johnson, Steve Karolyi, Thomas Ruchti, Andriy Shkilko (discussant), Mike Simutin (discussant), Elvira Sojli, Pingle Wang (discussant), as well as seminar and conference participants at the University of California – Riverside, Chapman University, the 2021 Midwest Finance Association meetings, the 2021 American Finance Association meetings, the 2020 Northern Finance Association meetings, the 2022 SAFE Market Microstructure conference, and 2022 Market Microstructure Online Seminar – Asia-Pacific. We are especially grateful to Baozhong Yang for sharing the link between ANcerno trades and Thomson Reuters portfolio holdings. A previous version of this article circulated under the title “The Information in Trade Financing.” Z.D. acknowledges financial support from the Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034) and the 111 Project (B20094). The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This article expresses the authors’ views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. Any errors are our own.

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