Contrarian Traders Research Articles

Short selling, informational efficiency, and extreme stock price adjustment

Using Chinese equity data from April 2009 to August 2020, we contribute to the literature by exploring the impact of short selling on stock prices in three aspects. First, we find that as short sellers become more active, stock price adjustments accelerate, and prices respond more swiftly to public information. Second, we investigate the trading behavior of short sellers during periods of extreme stock price fluctuations and reversals. Our empirical findings suggest that short sellers behave like contrarian traders during these periods and consequently, short sales reduce the stock price crash risk. Last, we find that in emerging markets dominated by individual investors, sentiment seems a key factor for short sellers to moderate market crashes. When the market experiences unexpected sudden plunges, short sellers become “support buyers” and reverse the previously bullish investor-dominated market sentiment, thus correcting mispricing and mitigating irrationality.

Short-term reversals, returns to liquidity provision and the costs of immediacy*

Some mutual funds act as contrarian traders, earning returns in the stock market by providing liquidity, while others demand liquidity and suffer costs of immediacy. The funds’ liquidity demand has increased over time. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity by 1.9% pa. High market beta funds, large cap funds, and funds exposed to momentum suffer over 2.5% pa. in costs of immediacy. Other results are that mutual funds’ average alpha becomes insignificant when the costs of immediacy are accounted for and in the cross-section, the funds’ costs of immediacy predict their alphas.

Destabilizing momentum trading and counterbalancing contrarian strategy by large trader groups

Purpose The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets. Design/methodology/approach The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility. Findings Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders. Originality/value This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.

The response of different investor types to macroeconomic news

We provide the first investigation of foreign, local institutional and local individual investors’ trading responses to global, regional and local macroeconomic surprises using daily buy-sell volumes for Korea, taking account of endogeneity. Investor types respond differently to different shocks and differentially to the same news. Responses also differ across market states. However, behavior is more complex than previously recognized. Local individuals’ (institutions’) responses to local news suggest they are contrarian (momentum) traders with respect to expected policy responses, rather than the raw shocks themselves. The importance of investor type to understanding the impact of macroeconomic news on behavior is highlighted.

Investor types and stock return volatility

Abstract The purpose of this paper is twofold: investigate how different types of investors affect stock return volatility, and provide some explanations based on investors’ trading behavior. Norway provides an excellent setting with monthly holding data of all investors on all listed firms over a period of 15 years. The results show that foreign investors increase stock return volatility because they trade the most, are momentum traders, and have the shortest investment horizon. In contrast, individual investors reduce stock return volatility because they trade the least, are contrarian traders, and have the longest investment horizon. Domestic institutional investors fall in-between these extremes.

Insider trading in Australia: Contrarianism and future performance

This paper examines, within the Australian market, the extent to which legal insider trades are information driven, premised on a disconnect between the market's assessment of firm value, and that of more informed insiders. I address the notion that insiders, endowed with superior information about their firm, are contrarian, reflecting disagreement with the market's current perception of firm value, and also use this knowledge by trading in advance of future performance indicators not known to the market. I find that insiders, directors in particular, are contrarian traders; they buy when their firm is in the bottom tercile according to prior returns (losers), and sell if their firm is a prior winner. Further, this behaviour is exacerbated if the firm is a value (glamour) stock. Finally, I show that even after controlling for the aforementioned factors, directors engage in net buying prior to positive accounting performance changes in the subsequent and following 12 month periods.

Institutional Country Herding

Using a noble set of data from 1999 to 2010, I investigate whether or not the US mutual funds following other mutual funds investing stocks into a country and out of another, institutional country herding. My empirical results reveal strong institutional country herding. The cross-sectional correlation between the fraction of mutual funds buying stocks of a country this quarter and buying the same country’s stock in the last quarter averages 26%. Additionally, cross-sectional evidence indicates that past country returns are negatively related to contemporaneous institutional demand, showing mutual funds in my sample are contrarian traders.

Discovering Traders’ Heterogeneous Behavior in High-Frequency Financial Data

This paper develops a utility-based heterogeneous agent model for empirically investigating intraday traders’ behaviors. Two types of agents, which consist of fundamental traders and technical analysts, are considered in the proposed model. They differ in the expectation of future asset returns and the perceived risk. This paper incorporates the unique characteristics of high-frequency data into the model for the purpose of having a reliable and accurate empirical result. In particular, a two-test procedure is developed to test the market fractions hypothesis that distinguishes the heterogeneous agent model from the representative agent model. The proposed heterogeneous agent model is estimated on the Taiwan Stock Exchange data. The results suggest that fundamental traders expect the correction of over- or under-pricing in the future. Technical analysts act as contrarian traders. Technical analysts also believe that buyer-initiated (seller-initiated) trading will further raise (lower) future prices. The bid-ask spread has a crucial effect on the investment risk for the technical analysts. Moreover, technical analysts are short-sighted, have less market fraction, but perform slightly better.

Does time-varying residual conditional heteroscedasticity in index returns affect trading behaviour of institutional investors in Indian Stock Market?

The objective of this research paper is to study the impact of time-varying residual conditional index volatility on the trading behaviour of institutional investors in Indian stock market. In this study the time-varying volatility is estimated using GARCH (1, 1) applied on the NIFTY daily index returns. The vector auto regression models are applied to observe the effects of past residuals of the variance series on the trading behaviour of institutional investors. The study finds that the domestic institutional investors are found to be highly risk averse (contrarian traders). On the other hand, the foreign institutional investors are found to be aggressive in their investments even if the idiosyncratic risk increases in the market. The impulse response functions observed in this study indicate that there is no significant impact of the trading behaviour of both domestic as well as foreign institutional investors on the idiosyncratic risk, which could be studied further in future research.

Momentum Trading, Contrarian Trading and Smart Money Manipulation

There are two commonly recognized anomalies in the stock market, namely short-run momentum and long-run reversals. Under these two financial market anomalies, there are two trading strategies – momentum trading and contrarian trading – that can be adopted for the purpose of making profits. We model an asset market in which momentum traders, contrarian traders and informed rational speculators make transactions. We discovered that under certain conditions, the self-profiting motive of informed speculators will lead to their price manipulation behaviors, and result in momentum and reversals phenomenon on the asset price. We also found that the scenario of the relative quantity of the two types of behavioral traders and their profit margins is similar to that of a minority game.

Market ecologies: The effect of information on the interaction and profitability of technical trading strategies

Technical trading strategies make profits by identifying and exploiting patterns in market prices—patterns generated by the interaction of market participants. Using a model market populated by individuals using a range of trading rules we show that the presence of technical traders may be beneficial, in some cases reducing volatility and increasing price efficiency. In particular, contrarian traders who base their decisions on high frequency data have the largest positive effect. It is also found that if technical traders condition their actions using ‘real time’ information, they partially emulate arbitrageurs and make positive profits.

Institutional Investor Trading in a Short Investment Horizon: Evidence from the Korean Stock Market

We examine the weekly trading activities of institutional investors in the Korean stock market. First, we find that average net trades by institutional investors this week are negatively related to one-week lagged returns, suggesting that they could be contrarian traders. Second, our finding shows that institutional investors’ net trades this week are positively related to the net trades next week, consistent with persistent trading and/or herding behavior. Third, we find that institutional net trades are positively related to the post one-week returns. Finally, our findings are most pronounced in the group of short-term institutional investors.

Foreign Equity Flows and Market Return Linkages: Evidence of Malaysian Stock Market

This study examines the linkages between foreign equity flows and stock market returns of Bursa Malaysia. Specifically this article intends to investigate whether past stock returns influence foreign equity flows or vice versa in a short-term time horizon. To explore the linkages between these two variables, this study employs bivariate vector autoregressive (VAR) model. In addition, to determine the causal relation between stock returns and foreign equity flows, this study utilizes VAR Granger causality test. The findings of this study provide evidence that foreign institutional investors are momentum traders, while foreign retail investors are contrarian traders with regard to the return of Malaysian equity market. Another main finding is that domestic equity returns have an effect on fund flows of foreign retail investors and vice versa; meanwhile, there is a positive causal relation between domestic equity returns and foreign institutional fund flows.

Profitability of time series momentum

Abstract We propose a continuous-time heterogeneous agent model consisting of fundamental, momentum, and contrarian traders to explain the significant time series momentum. We show that the performance of momentum strategy is determined by both time horizon and the market dominance of momentum traders. Specifically, when momentum traders are more active in the market, momentum strategies with short (long) time horizons stabilize (destabilize) the market, and meanwhile the market under-reacts (over-reacts) in short-run (long-run). This provides profit opportunity for time series momentum strategies with short horizons and reversal with long horizons. When momentum traders are less active in the market, they always lose. The results provide an insight into the profitability of time series momentum documented in recent empirical studies.

On the buying and selling behaviour of investor categories: evidence from Qatar

This study sets out to identify the trading patterns of foreign investors versus those of Qatar's domestic counterparts. Specifically, two chief issues are addressed. First, whether the buyside and sellside behaviours of individual and institutional foreign investor groups are different from those of domestic counterparts; and second, whether the demonstrated trading patterns are persistent over time. To tackle these issues, a multivariate vector autoregression (VAR) is performed. Both daily and weekly frequencies are considered in the analysis. Overall, the results indicate that domestic individual investors tend to pursue contrarian strategies when they buy stocks. On the sellside, they switch their behaviour from contrarian to momentum at longer horizons. Domestic institutional investors act like contrarian traders, whether they buy or sell shares. Foreign institutional investors are momentum buyers but contrarian sellers. Foreign individual investors pursue contrarian buying and momentum selling strategies, irrespective of the data frequency used. Additionally, all investor categories tend to herd when buying/selling stocks. These results provide some practical policy implications.

Incentives and Adaptive Expectations in a Financial Market with Heterogenous Agents

This paper establishes an agent-based model to describe the dynamic behaviour of the financial market with mutual fund managers and investors under two types of compensation contracts: asset-based fees and performance-based fees, and using two types of adaptive expectation: trend chaser and contrarian. Our results show that both of trading strategies of trend chaser and contrarian destabilise the market. However, trend chasers always trigger significant fluctuations, while contrarian traders bring along the slight up and down oscillations. The types of compensation contracts change the behaviour of contrarian traders, but have no influence to trend chaser. We also find that inertia parameter decrease the stability of market and induce market price to be underestimated. In particular, the heterogenous analysis under different compensation contracts shows that asset maximisers dominate the whole market and produce higher returns, which can be used to explain the current situation in real market that most of mutual funds choose asset-based contract. Moreover, the coexistence of two compensation schemes may amplify market fluctuations and create bubbles.

Impact of short selling activity on market dynamics: Evidence from an emerging market

With unique daily short sale data of Borsa Istanbul (stock exchange of Turkey), we investigate the dynamic relationship between short selling activity and volatility, liquidity and market return from January 2005 to December 2012 using a VAR(p)-cDCC-FIEGARCH(1,d,1) approach. Our findings suggest that short sellers are contrarian traders and contribute to efficient stock market in Turkey. We also show that increased short selling activity is associated with higher liquidity and decreased volatility. However this relation weakens during the financial turmoil of 2008. Our results indicate that any ban on short sales may be detrimental for financial stability and market quality in Turkey.

The Impacts of Individual Day Trading Strategies on Market Liquidity and Volatility: Evidence from the Taiwan Index Futures Market

We investigate the investment strategies of individual day traders in the Taiwan Index Futures market, along with their impact on market liquidity and volatility. Our results indicate a tendency among most individual day traders to behave as irrational contrarian traders. We also present consistent evidence to show that most individual day traders provide market liquidity by reducing the bid‐ask spread, temporary price volatility, and the temporal price impacts. Our results, which are consistent with the experimental results of Bloomfield, O'Hara, and Saar (2009) [Review of Financial Studies, 22:2275–2302], provide no support for the general criticism that day trading destabilizes the market while also exacerbating market volatility. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:399–425, 2015

코스닥 IPO 기업 공시에 대한 시장 참가자의 다양한 지능적인 반응의 차이점과 주식 거래 행태

본 논문은 주식 시장 참가자들의 여러 기업 공시에 대한 다양한 지능적인 반응의 차이점과 거래 행동에 영향을 미치는 주요 정보를 분석하였다. 본 연구는 2000년01월부터 2012년 09월까지 코스닥 시장에 신규 상장을 된 기업과 3가지 공시를(무상증자, 유상증자, 신규 시설 투자) 한 기업들을 대상으로 하였다. 시장 참가자들이 무상증자와 유상증자 공시일 경우에 긍정적으로 반응하고 신규 시설 투자일 경우에 부정적으로 반응하다는 연구 결과가 나왔다. 시장 거래량은 긍정적인 사건 전에 급격히 증가하며 모든 그룹의 참가자들의 매수가 활발히 이루어진다. 부정적인 사건일 경우에 기관 참가자들만 활발한 매수 행동을 보여준다. 종합적으로, 기관들은 모멘텀 전략을 보여주며, 개인과 외국인들은 반대투자전략을 보여준다. 본 논문의 합축성도 논의했다. In this paper, we investigate intellectual reaction differences among market participants to various corporate information announcements and the main information prompting investors to trade. Our research is based on IPO companies listed on the KOSDAQ exchange from January 2000 to September 2012 and concentrates on three information disclosures - bonus issue, seasoned equity offer, and new investment in facilities announcements. We find that intellectual market participants react positively to bonus issues and seasoned equity offers, but negatively to new investment announcements. Market trading volume increases before the positive events and all cgroups actively buy shares during these periods. For the negative events, only institution participants show active selling. Overall, institutions act as momentum traders, and individuals and foreigners as contrarian traders. We also discuss the implications of this study.

Time Series Momentum and Market Stability

We propose a continuous-time heterogeneous agent model consisting of fundamental, momentum, and contrarian traders to explain the significant time series momentum. We show that the market under-reacts in short-run and overreacts in long-run when momentum traders dominate the market, which provides profit opportunity for time series momentum strategies with short-time horizons and reversal with long-time horizons. We find momentum strategies with short horizons stabilise the market while the effect becomes opposite with longer horizons. The results provide an insight into the profitability of time series momentum documented in recent empirical studies.