Abstract
We examine short-horizon return predictability using a novel data set of institutional trades on large-cap U.S. stocks. We estimate investor-specific short-term trading skill and find that there is pronounced heterogeneity in predicting short-term returns among institutional investors. Incorporating short-term predictive ability, our model explains much higher fraction of variation in asset returns. Ignoring the heterogeneity in short-term trading skill can have major implications in modeling price impact. We uncover several stylized trading patterns of skilled trading: skilled investors choose larger trade sizes, avoid dark pools, and trade fewer stocks on any given day, but they do not time high-liquidity periods.
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