Trading Behavior Of Investors Research Articles

Does the Disclosure of Unrecognized Tax Benefits Affect Investor Uncertainty?

We examine whether the disclosure of tax-related uncertainty through unrecognized tax benefits (UTBs) resolves or exacerbates investors’ uncertainty about firm value based on evidence from investor trading behavior and information asymmetry around the time of the disclosure. We find that current year UTB additions are associated with reduced trading activity around the release of the 10-K and wider bid-ask spreads in the days following the 10-K release. We find no evidence of an association between UTB additions and contemporaneous abnormal returns. Our results suggest that UTB additions increase investor uncertainty and investors impound the information contained in UTBs into prices with a delay. Moreover, we find that our results are concentrated in firms that engage in greater tax avoidance and in firms with poorer financial reporting quality. We also find that the association between UTB additions and information asymmetry is concentrated among firms with low institutional ownership. Taken together, our results suggest that UTB disclosures increase short-term investor uncertainty about future firm value, which undermines the FASB’s goal of increasing the relevance and transparency of accounting for uncertain tax positions.

News and Intraday Retail Investor Order Flow in Foreign Exchange Markets

This paper examines the trading behavior of individual investors using a proprietary intraday dataset of a large pool of retail investor aggregate (minute by minute) long and short positions in EUR/USD for the period July 2014 to April 2016. Standard event study analysis shows no significant adjustment in trading ahead of scheduled macro news announcements and trading contrary to the announcement surprise after the event. A panel regression analysis shows that the contrarian trading behavior is mostly driven by lagged returns rather than fundamental macro news. Further intraday time series analysis shows that the lagged overall news sentiment also significantly affects investor net order flow. Finally, we show that simple cross-over trading strategies that exploit retail investor order flow imbalance are profitable. Overall our results suggest that retail investors in currency markets follow the news and are influenced by news sentiment and past returns, but do not possess the skills to extract fundamental information from public news. Their trading behavior contributes to the slowdown of the price discovery process. Our findings support the differential abilities of market participants to interpret public information as an explanation for the importance of order flow in price formation in currency markets.

The effect of market returns and volatility on investment choices in Chile’s defined contribution retirement plan

This study examines the trading behavior of active investors in Chile’s defined contribution retirement program in response to changes in market returns and volatility from 2007 to 2013, a period that included the Global Financial Crisis. Monthly trading among active investors increased when returns were negative but decreased with greater volatility, though less so during the crisis. The active affiliates tended to move to less risky funds when returns were negative and vice versa. However, higher volatility tended to increase risk taking but again less so during the crisis. Later, recommendations of an investment advisory service had significant effects on the investment behavior of some affiliates. Given the generally poor returns to active investors, the study ends with suggestions for improving Chile’s retirement program.

Chasing Dividends during the COVID-19 Pandemic

This paper investigates the impact of the COVID-19 pandemic on the trading behavior of investors around ex-dividend dates in Europe. The sudden decrease in the number of companies paying dividends reduced the opportunities to capture dividends. The firms that have maintained dividend payments during the pandemic thus attracted more interest than before. This led to a doubling in the magnitude of stock return patterns usually observed around ex-dividend days. Our evidence indicates that dividend-seeking investors are likely to be the main driver of the price patterns observed around ex-dividend dates.

The behaviour of US investors during presidential elections

PurposeThis study examines the influence of the presidential elections on the behaviour of US investors according to the trading activity of two of the most popular investment vehicles: exchange-traded funds and close-ended funds.Design/methodology/approachBased on the fact that investors in these two investment vehicles differ by, at least, two demographic factors that influence investment decisions, age and labour status, inferences are made about the degree of interest and the amount of trading activity that presidential elections provoke.FindingsThe evidence demonstrates that, during the last four US presidential elections, exchange-traded funds' investors trade significantly more than close-ended funds' investors during several event windows centred on the day of an election in which a republican candidate is elected. Close-ended funds' investors are more active during the election of a democratic candidate, although the statistical evidence in that regard is weak. Thus, it appears reasonable to conclude that younger investors who are gainfully employed are induced to trade by a presidential election in which a republican candidate prevails. Apparently, a democratic victory does not provoke the same behaviour.Originality/valueAlthough the relation between politics and economics is not an unexplored topic, it is not clear whether the presidential elections themselves constitute an event that triggers the trading behaviour of investors.

Role of Financial and Non-Financial Information in Shaping Trading Behavior: A Retail Investor’s Perspective

This study aims to examine the role of information disclosure in determining retail investor trading behavior. The approach of the study is deductive, while the quantitative strategy is adopted by using a survey questionnaire for data collection. Primary data was collected from 386 retail investors actively involved in stock trading at Pakistan Stock Exchange (PSX). Theoretical underpinning is based on the signaling theory. Covariance based structural equation modeling (SEM) has carried out to statistically examine the strength of the proposed model.The key findings of this study exhibit that on average, retail investors invest in firms with detailed financial and non-financial disclosures. The result also shows the intervening influence of perceived corporate image on retail investor decisions. Categorically, the finding of this study indicates that improved financial and non-financial disclosure practices support retail Investors to make sound stock investment decisions. The proposed model is novel to insight into the retail investor investment decision in the context of Pakistan.The results should be of interest to firms reporting detail and cohesive non-financial information with the presumption that it is requisite to influence the investor's investment decision making. The result reflects the mismatch between retail Investors' preferences and firm's information reporting practices, which in turn affect their appeal toward investment decisions. This study contributes to the comprehension of the information needs of retail investors and how it hailed their trading behavior. The findings of the study remain robust to firms listed on a stock exchange and retail Investor involved in stock trading.

The Variation in Variance Risk Premium and its Predictive Power: Evidence from Option Market Sentiments

We show that the highly volatile variance risk premium (VRP) can be theoretically and empirically reconciled with investor sentiment captured by temporary variation in risk aversion. In an effort to understand the poor predictive power of the VRP in non-U.S. markets, we propose a new investor sentiment index, the Variance Sentiment Index(VSI), obtained from the trading behavior of individual investors. We show that the VSI predicts local return dynamics, in a similar way to what the VRP does in the U.S. market. Moreover, the VSI does not lose its predictive power even in the presence of the global VRP.

The Impact of COVID-19 Pandemic on the Relationship between India’s Volatility Index and Nifty 50 Returns

The paper intends to re-examine the relationship between India’s Implied Volatility Index (IVIX) and Nifty 50 Returns during this COVID-19 pandemic. The study results are important for two reasons, one is to understand whether Indian VIX is fulfilling the purpose of measuring the near future volatility of Nifty 50 during this pandemic, and secondly, it reports the impact of COVID-19 on the investors’ perceptions about the returns and its volatility. The study results documented that the Nifty return and IVIX are moving independently during the COVID-19 pandemic and there is no association between market size and the market move. The one period lagged Nifty returns have a significant influence on the future market volatility. The combined impact of negative and positive Nifty returns on IVIX is not significant during the COVID-19 period. This implies that the Indian investors are not much worried about the fluctuation in the market price or size of the market during the COVID-19 pandemic period. The investors might be taking the market decline as an opportunity to invest and market rise as an opportunity to sell the stocks. Indian investors are much focused on the fundamentals than the market movements during this pandemic. The study results are important for the fund managers, policymakers, and analysts to understand the dynamics of emerging market volatility and the trading behavior of Indian investors.

Extreme Positive Payoffs and Mutual Fund Flows：Empirical Analysis Based on Chinese Mutual Funds

Domestic mutual fund investors show obvious short-term speculative behavior. They pay excessive attention to short-term performance, blindly chase funds with outstanding short-term performance, but the returns they earn are not high. Such behavior is related to investors’ lottery preference. They exhibit a preference for assets with a small probability of a large payoff because they overweight the probabilities of such an extremely positive outcome in a payoff distribution. The pricing implications of this preference have been studied in the stock, option, and IPO markets. Here we investigate how lottery preference affects investors’ mutual fund trading behavior.We use each fund’s maximum monthly return over the previous six months（hereafter, MAX）to represent investors’ lottery preference, and intend to verify that MAX can positively predict fund flows. Our sample covers 852 actively managed open-ended equity funds from year 2005 to 2019. First, we investigate whether MAX can positively predict future fund flows. We find a positive and significant relationship between MAX and future fund flows: a 1% increase in MAX is associated with an incremental flow of 1.43% over the following six months. This is in line with investors’ preference for extreme positive payoffs. Second, we investigate whether buying mutual funds based on MAX is rational. We find that high MAX cannot predict superior future performance: a 1% increase in MAX will cause 0.15% decrease in CAPM alpha. So it is irrational. Third, we investigate the heterogeneity of MAX－Flow relationship across investors with different rationality. We find that the positive MAX－Flow relationship exists in individual investors’ mutual fund flows, but it is not significant in institutional investors’ mutual fund flows. Lastly, we demonstrate that limited attention theory cannot fully explain our MAX－Flow relationship. After controlling the star fund effect, the positive MAX－Flow relationship still holds. The above results are robust.Our paper makes contributions to at least two areas of the literature: First, we directly prove that lottery preference steadily exists in the mutual fund market, which deepens our understanding of Chinese mutual fund investors’ behavior and expands the research of MAX anomaly. Different from the research based on the stock market, this paper uses the fund flow data to directly observe the trading behavior of fund investors, and constructs a complete research path of “MAX－investors’ trading behavior－fund performance”. It is found that lottery preference only exists in individual fund investors, and institutional investors are not obvious; funds with extreme positive return MAX in the past will have lower future returns, which enriches the research on the influencing factors of fund performance. Second, we find that the extreme return of funds will affect investors’ fund selection behavior, which enriches the research on “fund performance－fund flows”. Previous studies on “fund performance－fund flows” focus on the influence of the average or cumulative value of historical returns on fund flows, but pay less attention to the influence of the distribution characteristics of fund historical income on fund flows. This paper finds that funds with extreme positive returns in the past will get more fund inflows in the future, which is enlightening for the regulatory authorities to supervise the investment behavior of fund managers.

The impact of closing mechanism changes: evidence from the Shanghai stock market

PurposeThe purpose of this paper is to empirically examine the impact of closing mechanism changes on market quality, investor trading behavior and market manipulation in the Shanghai stock market.Design/methodology/approachA dummy variable is constructed indicating whether the closing mechanism is call auction or continuous auction. Market quality is measured from aspects of liquidity, volatility and price continuity; investor trading behavior is scaled by order timing and order aggressiveness, and a price deviation indicator is the proxy of manipulation. Using panel regression, this study examines the impact of closing mechanism changes based on intraday transaction data from the Shanghai stock market.FindingsThe conclusions are as follows: First, market quality improves after the closing mechanism is reformed in terms of liquidity, volatility and price continuity. Second, order strategy changes significantly in the closing call market, and investors trade more aggressively in the continuous trading period before closing. Third, the closing call mechanism restrains the closing price manipulation and thus prompts an efficient closing price.Originality/valueThis paper examines the policy effects of closing mechanism changes from aspects of market quality, trading behavior and price manipulation, providing pieces of evidence for trading mechanism design and market supervision in emerging markets.

Understanding the impact of investor sentiment on the price formation process: A review of the conduct of American stock markets

Applying both survey-based and market-based measures, we examined how investor sentiment affects the way with which prices reflect information and whether or not it manifests itself in the trading behavior of investors in the U.S. stock market. We also compared the effect of investor sentiment on several U.S. stock market indices. Our research improves our understanding of the price formation process when supporting the notion that sentiment-induced buying and selling is an important determinant of stock price variation. Our research design is novel as it suggests that sentiment-driven traders may not be as irrational as is presupposed in classical asset pricing and it provides more comprehensive statistical evidence on the impact of differing types of sentiment on the price formation process, especially in the various U.S. stock market indices. We consider that sentiment is linked to shifts in risk tolerance and this triggers contrarian-type behavior. Given this, using an EGARCH parameter estimation, we have shown the following concerning the behavior of sentiment driven investors; (i) They are more motivated to trade on survey-based indicators than market based indicators, (ii) They respond asymmetrically to shifts in sentiment and trade more aggressively during periods of declining sentiment, (iii) They respond asymmetrically to sentiment measures when incorporating the possible impact of market conditions and business cycles on trading behavior.

Liquidity commonality on National Stock Exchange: size and sector effect

ABSTRACT This study investigates the sources of liquidity commonality in an emerging Asian market. Specifically, the demand side and supply side factors were tested in an order-driven Indian stock market. The results indicate that growth in the industrial production and bank credit reflecting the supply side variables are found to have significant influence on liquidity commonality. However, compare to the supply side, demand side factors reflecting the trading behaviour of domestic and foreign institutional investors exhibited higher influence. Study has further extended the literature by investigating the size and sectorial effects and found heterogeneous impact on commonality.

The Effect of the COVID-19 Spread on Investor Trading Behavior on the Egyptian Stock Exchange

This paper aims to study the effect of Coronavirus on the trading behavior of both individual and institutional investors in the Egyptian Stock Exchange, as the

Does sentiment determine investor trading behaviour?

ABSTRACT Sentiment is a determinant of investors’ trading decisions and behaviours. After a sentiment shock, investors’ net positions change differently across investor types. In response to a sentiment change, individual (institutional) investors follow a positive (negative) feedback strategy, reflecting their different trading and investment purposes.

Stock Price Manipulation: Corporate Actions and the Exploitation of Retail Investors in China

Using account level data from the Shanghai Stock Exchange, we find widespread evidence consistent with insiders manipulating share prices to exploit naive retail investors. We identify a group of “suspicious” firms that use stock splits—perhaps, along with other misleading activities—to artificially inflate their share prices. Retail investors are strongly attracted to these suspicious splits, providing insiders an opportunity to sell large blocks of shares or use their shares as collateral for loans. A group of large accounts exploits the positive feedback trading behavior of naive retail investors by accumulating positions before suspicious split announcements and selling in the post-split period.

Market Participation Willingness and Investor’s Herding Behavior: Evidence from an Emerging Market

With the newly emerged dataset on investors’ willingness to participate into the stock market, this paper gives the first empirical evidence on the impacts of the market participation on investors’ herding behavior in Chinese stock market. The empirical results mainly show that: (1) investors’ market participation willingness is positively related to investors’ herding behavior; (2) the herding behavior is more pronounced in the periods of investors’ market participation willingness is high and rising; and (3) these impacts are more pronounced in the period from April 1, 2012 to March 9, 2016. Generally speaking, our results indicate the interdependence between investor trading behavior and online sentiment.

Do Cryptocurrency Markets React to Issuer Sentiments? Evidence from Twitter

Researchers and practitioners increasingly use posts on Twitter as an additional source of information to analyze cryptocurrency price movements. Previous studies focusing on the stock markets have illustrated the impact of corporate sentiment disclosure on stock returns and trading volumes. This study explores the cryptocurrency market reaction to issuer Twitter sentiments. I find that cryptocurrency prices react positively to Twitter sentiments, while the trading volumes react positively to the absolute value of Twitter sentiments in a timely manner (within 24 hours). Further analysis in this study reveals that the market reactions are mainly driven by the incremental sentiments contained in Twitter posts. This study sheds light on the trading behavior of investors in the cryptocurrency markets.

How Do Taxes Affect the Trading Behavior of Private Investors? Evidence From Individual Portfolio Data

How do taxes affect the investment behavior of private stock-market investors? We exploit a large reform of capital-gains taxation in Germany combined with confidential portfolio-level daily panel data to study the causal effect of capital-gains taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods and non-parametric regressions, we quantify the tax effect and identify interesting patterns of heterogeneity. Asset holding periods exhibit a tax elasticity of 0.368 for gains and -0.435 for losses. Because the theoretical tax effect on trading behavior runs in opposite direction to the well-established disposition effect, we further study the interaction between taxes and the disposition effect. We find evidence that the disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.

How do Taxes Affect the Trading Behavior of Private Investors? Evidence from Individual Portfolio Data

We exploit a large reform of capital-gains taxation in Germany combined with portfolio-level daily panel data to study the causal effect of taxes on individual stock-trading behavior and the disposition effect. We find substantial spikes in selling probabilities around an intertemporal tax discontinuity, and no such spikes after the abolishment of the discontinuity. Using difference-in-bunching methods, non-parametric regressions and effective tax rates, we quantify the tax effect and identify interesting patterns of heterogeneity. We further find evidence that the well-established disposition effect is strongly affected by the tax discontinuity through tax motivated selling of both gains and losses.

Heterogeneous traders, house prices and healthy urban housing market: A DSGE model based on behavioral economics

A healthy urban housing market should be characterized by relative stability, which is reflected in reasonable fluctuations in housing prices. However, house prices in China have experienced rapid and prolonged growth of approximately twice that of people's disposable income since 2004. This growth can be attributed to the heterogeneous trading behaviors of value investors and domestic and foreign speculators. By constructing a Dynamic Stochastic General Equilibrium (DSGE) model based on the theory of behavioral economics, this study explores how fundamental and speculative investments affect housing prices and economic fluctuations in a market with heterogeneous traders. The devising of optimal macro-control policy is also discussed. Results show that speculators in the housing market explain the rapid rise and slow decline of house prices, which negatively affects a healthy housing market and its output. Excessive substitution effect between consumption and housing purchase resulting from the real estate boom also negatively affects the final output. The simulation experiments of policy intervention show that the combination of exchange rate regulation and property tax contributes to the stability of the housing market and macro-economy as a mix of short- and long-term policies. This paper holds that to ensure the economy's sustainable development in the new era, the central bank should implement market-oriented reforms of the exchange rate and lay out the landing of property tax properly.