RETURN AUTOCORRELATION AND INSTITUTIONAL INVESTORS

We propose and test the hypothesis that trading by institutional inves tors contributes to serial correlation in daily returns. Our results d emonstrate that NYSE portfolio and individual security daily return au tocorrelations are an increasing function of the level of institutiona l ownership. Moreover, the results are consistent with the hypothesis that institutional trading reflects information and increases the spee d of price adjustment. The relation between autocorrelation and instit utional holdings does not, however, appear to be driven by market fric tions or rational time-varying required rates of return. We conclude t hat institutional investors' correlated trading patterns contribute to serial correlation in daily returns.