Short-term Trading and Stock Mispricing

Abstract

This paper examines the influence of short-term trading on stock mispricing. Using a mispricing index proposed by Stambaugh, Yu, Yuan (2012, 2015) as a proxy for stock mispricing, This paper investigates how sensitive quarterly short-term institutional trading is to changes in the level of stock mispricing. This paper’s main finding is that trading by short-term institutions is negatively associated with the change-of-stock mispricing index, especially when stock liquidity is high. This paper supports the theoretical view of Cespa, Vives (2015), in which short-term trading can improve price informativeness when liquidity trading is persistent. Also, this research contributes to a better understanding of the interplay between short-term trading and stock mispricing, offering insights into its role in enhancing price efficiency and market dynamics.