Tournament-type utility, absolute cumulative intra-quarter return, institutional feedback trading and return autocorrelation

Abstract

We examine the behavioral basis of Johnson’s (2016) model of competition among asset managers with tournament type utility, offered to explain short-horizon reversals in stock market returns. First, we report that the intriguing pattern -the absolute cumulative intra-quarter return $\left(r_t^Q\right)$ drives negative autocorrelation in S&P500 returns-, by which Johnson (2016) supports the disagreement-about-persistence (DAP) mechanism in his model, pervasively holds in international stock markets. In contrast, we find limited evidence of institutional trading behavior consistent with the DAP mechanism, using data with institutional trader identities from Finland and S&P500 futures position data. The pattern’s association with the DAP mechanism is doubtful. We document a new empirical fact, which provides a more robust alternative explanation compatible with the pervasiveness of this pattern: $\left(r_t^Q\right)$ drives the intensity of aggregate institutional positive feedback trading, which in turn drives time-variation in return autocorrelation.