Tuomo Vuolteenaho

Caught On Tape: Predicting Institutional Ownership With Order Flow

Many questions about institutional trading behavior can only be answered if one can track institutional equity ownership continuously, yet institutional ownership data are only available on quarterly reporting dates. We infer institutional trading behavior from the “tape”, the Transactions and Quotes database of the New York Stock Exchange, by regressing quarterly changes in reported institutional ownership on quarterly buy and sell volume in different trade size categories. We find that institutions in aggregate demand liquidity, in that total buy (sell) volume predicts increasing (decreasing) institutional ownership. Institutions also tend to trade in large or very small sizes, in that buy (sell) volume at these sizes predicts increasing (decreasing) institutional ownership, while the pattern reverses at intermediate trade sizes that are favored by individuals. Our regression method predicts institutional ownership significantly better than the simple cutoff rules used in previous research.

New Forecasts of the Equity Premium

If investors are myopic mean-variance optimizers, a stocks expected return is linearly related to its beta in the cross section. The slope of the relation is the cross-sectional price of risk, which should equal the expected equity premium. We use this simple observation to forecast the equity-premium time series with the cross-sectional price of risk. We also introduce novel statistical methods for testing stock-return predictability based on endogenous variables whose shocks are potentially correlated with return shocks. Our empirical tests show that the cross-sectional price of risk (1) is strongly correlated with the markets yield measures and (2) predicts equity-premium realizations especially in the first half of our 1927-2002 sample.