The Interim Trading Skills of Institutional Investors

TLDR

The paper investigates the interim trading skills of institutional investors using a large proprietary database of trades from 1999‑2005. It analyzes intra‑quarter round‑trip trades within this database. The analysis shows that institutional investors earn significant abnormal returns on intra‑quarter round‑trip trades, that the stocks they buy outperform those they sell within the quarter, and that these skills persist, driven mainly by skilled portfolio managers, implying prior studies underestimated institutional investment skill.

Abstract

Using a large proprietary database of institutional trades for the period 1999-2005, this paper examines the interim (i.e., intra-quarter) trading skills of institutional investors. We find strong evidence that institutional investors earn significant abnormal returns on their intra-quarter round-trip trades. Furthermore, the stocks institutions buy significantly outperform the stocks institutions sell within the quarter, suggesting that these institutions have superior skills in timing their trades. More importantly, these interim trading skills are persistent, and the persistence is driven primarily by skilled portfolio managers as opposed to unskilled managers. Our study complements prior studies that use quarterly institutional holdings data, while suggesting that these studies have likely understated the investment skills of institutional investors.