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Correlated Trading and Returns





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      Dorn is with the LeBow College of Business, Drexel University; Huberman is with Columbia Business School and CEPR. Sengmueller is with CentER—Tilburg University and University of Amsterdam. We thank Martin Bohl, Maurice Bun, Larry Glosten, Will Goetzmann, Charlie Himmelberg, Frank de Jong, Anne Dorn, Alexander Ljungqvist, Mark Seasholes, Rob Stambaugh (the editor), Suresh Sundaresan, Russ Wermers, an anonymous referee, seminar participants at the Helsinki School of Economics, and conference participants at the 2006 workshop on “The Architecture of Financial System Stability” in Capri (Italy), the 12th Mitsui Life Symposium on Financial Markets at the University of Michigan, and the 2006 WFA meetings in Keystone for their comments. We also thank Inessa Love for sharing her panel VAR code with us. Daniel Dorn acknowledges financial support from a Dean's research grant.


A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure. Correlated limit orders also predict subsequent returns, consistent with executed limit orders being compensated for accommodating liquidity demands.

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