Trading Behavior Of Investors Research Articles

Don’t Confuse Brains with a Bull Market: Attribution Bias, Market Condition, and Trading Behavior of Individual Investors

By comparing the trading behavior of individual investors in different market conditions, this paper tests the theory that attribution bias - inflated confidence in one’s own skill - creates overconfident traders. In a bull market, investors incorrectly attribute trading successes (luck) to their own abilities and therefore should be more overconfident than they are in a normal or a bear market. Consistent with this argument, we find that in a bull market investors exhibit more overconfidence indicated by the extent of excessive trading. This finding cannot be explained by alternative explanations such as disposition effect and the tendency to gamble.

Do Institutional Investors Value the 10b-5 Private Right of Action? Evidence from Investor Trading Behavior Following Morrison V. National Australia Bank Ltd. (2010)

Do Institutional Investors Value the 10b-5 Private Right of Action? Evidence from Investor Trading Behavior Following Morrison V. National Australia Bank Ltd. (2010)

Don’t Confuse Brains with a Bull Market: Attribution Bias, Market Condition, and Trading Behavior of Individual Investors

Theory predicts that attribution bias creates overconfident traders and thus causes excessive trading in the market. This paper tests this prediction by comparing the trading behavior of individual investors in different market conditions. In a bull market, investors suffer more from attribution bias and therefore should be more overconfident and trade more excessively. Using the trading records of Chinese individual investors from January 2005 to November 2008, we find that individual investors trade more excessively, measured by higher turnover and poorer performance, in a bull market than in a bear market.

Foreign Investors’ Trading Behavior in Response to Crises: Evidence from Thailand

This paper examines the trading behavior of foreign investors in Thailand and its impact on the country’s stock market and currency value during January 1, 1975 to August 31, 2009. We also investigate if the trading strategy of foreigners has changed during the 1997 financial crisis, 2004 Tsunami crisis, and 2006 and 2008 political crisis. For the entire sample period, foreign investors were the net purchaser of Thai equity and implemented positive feed-back investment trading strategy, while domestic investors were the net sellers with a contrarian investment strategy. The trading behaviors of foreign investors do not change during the financial and tsunami turmoil and 2006 political upheaval in Thailand. These crises do not scare foreign investors out of Thailand. It was the trading activities of domestic individual investors that destabilized the stock market of Thailand during the 1997 Asian financial crisis. The trading activities of all investors cause a major destabilizing effect on Thai equity during the 2008 political crisis, particularly individual investors exert the strongest destabilizing effect. There is no evidence of price-destabilizing effect during the 2004 Tsunami crisis. The trading activities of domestic individual and institutional investors do not cause any destabilizing effect on Baht currency value caused by the trading activities of domestic individual and institutional investors were not found in any of the financial, tsunami, and political crises. Only did the trading activities of foreigners cause the baht to devalue during the 1997 Asian financial crisis.

Is Trading Behavior Stable Across Contexts? Evidence from Style and Multi-Style Investors

We investigate whether investors tend to form expectations about different categories of assets in a consistent, similar fashion, or whether an investor would apply different models for forming expectations depending on the classification or characteristics of the assets. We investigate the trading behavior of investors who specialize in value assets, investors who specialize in growth assets, and investors who trade both value and growth. We find important systematic differences in trading tendencies. Growth investors tend to follow a momentum buying and contrarian selling strategy and tend to rely on short term return signals while value investors follow a contrarian buying and momentum selling strategy and tend to rely on longer-term return signals. Surprisingly, multi-style investors, those who trade both value and growth, use different strategies depending on the style of asset being traded. When trading growth, the multi-style investor uses a momentum buy and contrarian sell strategy. However, when trading value, the multi-style investor uses a contrarian buy and momentum sell strategy. Hence, the multi-style investor trades like both the value and the growth style-investors. Investors adopt different trading strategies depending on the characteristics of asset being traded.

Understanding commonality in liquidity around the world

We examine how commonality in liquidity varies across countries and over time in ways related to supply determinants (funding liquidity of financial intermediaries) and demand determinants (correlated trading behavior of international and institutional investors, incentives to trade individual securities, and investor sentiment) of liquidity. Commonality in liquidity is greater in countries with and during times of high market volatility (especially, large market declines), greater presence of international investors, and more correlated trading activity. Our evidence is more reliably consistent with demand-side explanations and challenges the ability of the funding liquidity hypothesis to help us understand important aspects of financial market liquidity around the world, even during the recent financial crisis.

Does Overconfidence Harm Individual Investors? An Empirical Analysis of the Taiwanese Market

This article uses the approaches of (Journal of Finance 53, 1998, 1775) and (The Review of Financial Studies 19, 2006, 1531) to study the influence of overconfidence on the trading behavior of investors based on the accounts of 1185 individual investors in the Taiwan market. In addition, private information, interaction effect, and credit are treated in the analysis to establish a model of psychological bias and trading behaviors. To prevent the effects of the subprime mortgage crisis on the stock market from affecting our dataset, the study period is set from January to September 2010; the data frequency is monthly so that complete economic cycles are included. Robustness analyses such as Newey–West and nonlinear regression reveal several important findings. First, Taiwanese traders exhibit the disposition effect, especially under bear market conditions. Second, on the cross-section, a more overconfident investor tends to show a higher degree of the disposition effect. Third, overconfident traders prefer to invest in small cap stocks. Fourth, leveraged, overconfident traders with private information eventually hold losers too long.

Institutional Trading Behavior in the ETF Market

We examine the trading behavior of institutional investors in the Exchange Traded Fund (ETF) market from 1993 to 2007. We concentrate on the relation between cross-sectional institutional ETF ownership and returns, particularly on the relation between changes in ownership and future returns, between past returns and institutional ownership, and between changes in ownership across institution classes (i.e. herding). Our results do not show evidence of a significant relation between changes in institutional ownership and future ETF returns. However, consistent with the use of negative feedback investment strategies, institutional investors tend to exhibit excess demands for past losers, especially in sector and international ETFs. They also exhibit high degrees of herding behavior, with banks driving the bulk of these results. Furthermore, their herding behavior is influenced by their experience in the ETF market and by certain ETF characteristics, such as liquidity and size, suggesting an aversion for information uncertainty leads them to herd.

Foreign vs domestic investors and the post‐announcement drift

PurposeThis paper aims to investigate who causes post‐announcement drift and whether this drift is observed for various types of news announcements.Design/methodology/approachUsing Finnish share ownership data, the authors examine the trading behavior of foreign and domestic investors during the post‐announcement periods of scheduled earnings and unscheduled non‐earnings announcements.FindingsThe results show that the post‐announcement drift exists for both types of news, but only if the news is negative. As a group, foreign investors react first by selling shares of firms reporting negative information. Domestic investors act in the opposite manner.Originality/valueThe results imply that the post‐announcement drift is a special case of a more general post‐disclosure phenomenon and that investor differences (most likely information processing skills) is one likely explanation for its pervasiveness.

The value premium and the January effect

PurposeThe purpose of this paper is to investigate the seasonal effect in the value premium puzzle. It studies whether the book‐to‐market effect is an outcome of the January effect observed among stock returns.Design/methodology/approachThe paper uses returns of portfolios based on size and BE/ME ratios as Fama and French suggest to define value premium and investigate the seasonality of the BE/ME effect. The paper tests whether the value premiums observed among large and small stocks are different in January and non‐January months. It examines the turn‐of‐the‐year effect on the value premium by analyzing the returns of BE/ME portfolios during the first and last ten trading days of a calendar year.FindingsEmpirical evidence supports the fact that value premium has different patterns in January and non‐January months for large and small capitalization firms. It was found that large stocks have a significant value premium only in January and this high January value premium among large stocks is mainly driven by loser stocks at the turn of the year. In contrast with large stocks, the value premium of small stocks occurs only in non‐January months.Originality/valueThis paper shows that value premium of large and small stocks are different in January and non‐January months. Furthermore, the past performance of stocks plays a key role in the observed January value premium among large stocks. Finally, this study provides evidence to show that the value premium among large stocks may be explained by investor trading behavior.

Trading Behavior, Performance, and Stock Preference of Foreigners, Local Institutions, and Individual Investors: Evidence from the Korean Stock Market*

AbstractWe examine the trading behavior and performance of foreigners, local institutions, and individual investors in the Korean stock market. The key research issue is whether the commonly‐documented information disadvantage of foreign investors translates into their underperformance relative to local institutional and individual investors. Our results show the opposite, that the stocks foreigners buy significantly outperform the stocks they sell in terms of both stock returns and operating profitability, leading to the significant outperformance of foreigners’ trading strategies over those of local investors. Our results provide strong evidence that the superior performance of foreigners is attributed to their ability to discern between company stocks with good versus bad, at least short‐term, prospects. Our findings on the trading behavior of investors in the Korean market are, in general, consistent with those for other markets documented in the published literature. Foreigners behave like short‐term momentum traders pursuing a growth strategy. Local institutions also trade like momentum traders but tend to buy value stocks. In contrast, individual investors trade like contrarians who buy past losers and sell past winners. Our findings show that foreigners prefer large‐cap stocks with high dividends. In sharp contrast, individual investors have a strong preference for small‐cap, high‐leverage, low dividend paying stocks, whereas local institutions tend to buy small‐cap, low leveraged stocks.

Informed Institutional Trading Around Merger andAcquisition Announcements

Merger and acquisition (M&amp;A) activities are not well-anticipated corporate events in the equity market.Do institutional investors possess material non-public information before M&amp;A announcements? Using a novel methodology that infers high frequency institutional trading, this article investigates the daily trading behavior of institutional investors in target firms before and after M&amp;A announcements in the U.S. equity market from 1993 to 2004. The methodology is based on combining two publicly available datasets: the NYSE Trades and Quotes (TAQ) dataset and the institutional ownership report (13F). The author finds that all institutional investors start to accumulate net buying positions in target firms as far as 30 days before an announcement date. Institutional investors are not a homogeneous group in terms of trading strategies, regulations or information venues, but, surprisingly, they exhibit similar trading patterns prior to the event.This trading pattern indicates that institutional investors may possess material non-public information. On and after the announcement day, investment advisors tend to be merger arbitragers and buy more shares of target firm stocks to speculate on final deal consummation; while banks, insurance companies, and mutual funds immediately reverse their positions to cash in, a behavior consistent with the early informed traders acting as “shortterm profit takers.” The author rules out the possibility of a market-wide information leak prior to the event because prices of target firms do not show any significant price run-ups. Also, the fact that institutions are net sellers in rival firms of targets before the announcement, allows us to rule out the possibility that institutional investors have better models to predict possible takeovers, rather than inside information. Finally, the author shows that the trading by institutions before M&amp;A announcements is associated with a higher probability of informed trading, for the firms they trade. <b>TOPICS:</b>Statistical methods, information providers/credit ratings

The Effect of Regulatory Reforms on Institutional and Retail Investors: Evidence from Restatements before and after the Sarbanes-Oxley Act

Regulators have expressed concern that the growing number of financial restatements, especially since the passage of the Sarbanes-Oxley Act of 2002 (SOX), confuse investors and erode confidence in the capital markets. Given the investor protection goal of SOX, of particular concern is the relative accuracy with which retail investors process and trade on the information contained in restatement announcements. In this paper, we propose a method to examine the accuracy of the trading behavior of retail and institutional investors conditioned upon accounting restatement announcements, both prior- and subsequent to the passage of SOX. We find that retail investors engaged in more inaccurate (i.e., potentially loss-making) trades in the post-SOX period than in the pre-SOX period. In contrast, the accuracy of institutional investors’ trades does not show any significant difference between the pre- and post-SOX regimes. Our evidence suggests that retail (but not institutional) investors process post-SOX restatements more inaccurately than pre-SOX restatements.

Individual investor behaviour: evidence from the clients of a small credit cooperative bank

Individual characteristics are important in explaining investor trading behaviour. The clients of a small cooperative bank are analysed over the three–year period 2005–2007 to measure the effect that age, gender, income, job position and status of online trader has on the number of stock trades completed. A negative binomial regression is used since our dependent variable, the number of trades, can only assume non–negative discrete values. This paper shows that the number of transactions increases if the client is: man vs. women; self–employed vs. employee, retiree or housewife; online vs. traditional trader; higher vs. low income. Our findings are not clear cut with respect to age. In conclusion, individual characteristics are important in explaining an individual's trading behaviour since they affect an investor's attitude towards risk and overconfidence.

Who is the more overconfident trader? Individual vs. institutional investors

Guided by the Gervais and Odean (2001) overconfident trading hypothesis, we comprehensively investigate the trading behavior of individual vs. institutional investors in Taiwan in an attempt to identify who is the more overconfident trader. Conditional on the various states of the market, on market volatility, and on the risk level of the securities they trade, we find that both individual and institutional investors trade more aggressively following market gains in bull markets, in up-market states, in up-momentum market states, and in low-volatility market states and that only individual investors trade more in riskier securities following market gains. More importantly, we find that individual investors trade more aggressively following market gains in the three conditional states of the market and in high-volatility market states than institutional investors. Also, individual investors trade more in relatively riskier securities following gains than institutional investors. These findings provide evidence that individual investors are more overconfident traders than institutional investors.

An Econometric Study of Trading Behaviour of Institutional Investors in Indian Stock Market: The Vector Auto regression Approach

The present paper endeavours to study the trading behaviour of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in Indian stock market. The study ascertains whether the purchase trade and sale trade behaviour of foreign institutional investors is different from their domestic counterparts and whether their trading pattern remains persistent over time. The paper adopts multivariate Vector Auto Regression (VAR) approach to analyse these issues. As compared to earlier studies, the present paper uses a wider definition of domestic institutional investors (DIIs) that includes not only mutual funds (MFs) but also banks, insurance companies and other domestic financial institutions. The outcome of the analysis indicate that the foreign institutional investors (FIIs) appear to be very short term momentum buyers in their purchase trade and appear to be neither momentum nor contrarian sellers in their sale trade. Additionally the trading behaviour of both foreign and domestic institutional investors also shows the evidence of contemporaneous trade and intra group herding in Indian stock market. The Variance Decomposition Analysis also indicates that trading behaviour of institutional investors and market index returns have impact on each other in Indian stock market.

Why Investors do not Buy Cheaper Securities? An Analysis of Trading by Individual Investors in Chinese Stock Market

We examine trading behavior of Chinese domestic investors after they are given access to the B-share market from 2001. We observe that even though A-shares trade at a premium to B-shares, domestic investors are reluctant to switch. The portfolio inertia can be explained by market-specific experience. Investors are less likely to buy B-shares if they have more experience in the A-share market, and vice-versa. The market-specific experience constrains the extent that investors respond to A/B share premium and liquidity, and has an adverse effect on their trading performance. Our study suggests that overweighting of personal experience can cause portfolio inertia.

Idiosyncratic risk, returns and liquidity in the London Stock Exchange: A spillover approach

Recent evidence has shown that liquidity and idiosyncratic risk may be priced factors in the cross section of expected stock returns and that market capitalization significantly affects investor behavior and liquidity. We explore the interactions between liquidity, idiosyncratic risk and return across time as well as across size-based portfolios of stocks listed in the London Stock Exchange. We find that volatility spills over from large to small-cap stocks and vice versa and is predicted by illiquidity shocks in both small and large-cap portfolios. Illiquidity is forecasted by return shocks in small-cap stocks. Finally, we document some evidence of asymmetric liquidity spillovers, supporting the intuition that market-wide information is first incorporated in the trading behavior of large-cap investors and is then transmitted in the trading of small stocks.

Stock return seasonalities and investor structure: Evidence from China's B-share markets

This paper investigates whether seasonalities in daily stock returns are related to the trading behavior of individual and institutional investors. The change in the investor structure of B-share markets in Shanghai and Shenzhen after the abolition of ownership restrictions in 2001 provides a unique testing environment. We show that day-of-the-week eects are attenuated after the market entrance of Chinese individual investors who had previously not been allowed to trade in B-shares. Our empirical results suggest that institutional rather than individual investors are a main driving force behind such anomalies. In addition, we nd evidence of reduced index return autocorrelation and US spillover eects in the post-liberalization period.

Taxes and Ex-Dividend Day Returns: Evidence From REITs

The distributions of Real Estate Investment Trusts (REITs) are comprised of components that differ in how they are taxed to the recipient shareholders. This variation in tax characteristics enables us to study the effect of shareholder taxes on stock prices around ex-dividend days, while avoiding the problems associated with non-tax confounding factors and intertemporal tests that have hampered the interpretation of previous studies. Using a dataset that includes the component makeup of individual REIT distributions, we provide evidence that abnormal returns and trading volume around ex-dividend days are driven by the component of the distributions that is most tax-penalized. Our results support a tax-based explanation for ex-dividend day pricing and investor trading behavior.