Essays in Asset Pricing and Market Microstructure

Abstract

This dissertation contains three essays on asset pricing and market microstructure. The first chapter documents that institutional investors support asset prices through the asymmetric execution of routine trades. Institutional buy orders generate a 50-100% larger price impact than equivalent sell orders, thereby creating price support for existing holdings even without active net buying. The asymmetry intensifies near reporting period ends when valuation incentives peak, and for larger positions where price increases yield greater portfolio-wide gains. Quasi-exogenous flow-induced trades rule out alternative explanations such as information asymmetry. High institutional ownership stocks earn a 5.7% cumulative four-factor alpha over 18 months before fully reversing, and a long-short strategy exploiting within-quarter seasonality yields 13.2% annualized alpha over four decades. The second chapter reveals how limit order clustering at round-number price thresholds generates predictable return dynamics over daily, weekly, and monthly horizons. Stocks closing just above a round number (e.g., $6.10) outperform those closing just below (e.g., $5.90) by 24.6, 46.1, and 68.7 basis points the next day, week, and month. Using real-time bid-ask depth imbalances from TAQ data, the chapter provides the first evidence causally linking this return predictability to concentrated limit orders at round prices. The effect is weaker among stocks with higher institutional activity, suggesting a significant role for retail investors. Order clustering also slows the incorporation of earnings-announcement news and contributes to short-term return reversals. The third chapter decomposes the stock momentum effect and finds that 70% reflects return continuation on the same weekday (e.g., Mondays predict future Mondays). Even after accounting for partial reversals on other weekdays, same-weekday momentum contributes 20-60% of the total momentum effect. This pattern is difficult to reconcile with traditional momentum theories based on investor misreaction. Instead, the chapter provides direct evidence linking same-weekday momentum to within-week seasonality and persistence in institutional trading, offering the first direct evidence that seasonal fund flows drive seasonal institutional trading.