Trading Motives Research Articles

Retail Trading Around Earnings Announcements: Evidence from Robinhood Traders

Retail investors from the discount broker Robinhood swarm into stocks with pending earnings announcements and stay away from them immediately after the announcements. We study four competing explanations for this phenomenon: liquidity provision, informed trading, lottery preference, and attention-induced herding by noise traders. We find strong evidence that, immediately around earnings announcements, Robinhood investors’ behavior is primarily driven by attention-induced noise trading. Our results offer new insights into retail traders’ motivation for trading when they face heightened uncertainty from earnings announcements. We also find corroborative evidence from a proprietary data that tracks retail trading activities from NASDAQ.

The Dark Side of Circuit Breakers

ABSTRACTMarket‐wide circuit breakers are trading halts aimed at stabilizing the market during dramatic price declines. Using an intertemporal equilibrium model, we show that a circuit breaker significantly alters market dynamics and affects investor welfare. As the market approaches the circuit breaker, price volatility rises drastically, accelerating the chance of triggering the circuit breaker—the so‐called “magnet effect,” returns exhibit increasing negative skewness, and trading activity spikes up. Our empirical analysis supports the model's predictions. Circuit breakers can affect overall welfare negatively or positively, depending on the relative significance of investors' trading motives for risk sharing versus irrational speculation.

The Role of Javanese Women in Domestic and Public Spheres: Challenges, Trade Motives, and Parenting Practices

Purpose – This study aims to explore the dual role of Javanese women who engage in trade at traditional markets and their role as mothers in parenting practices. Design/methods/approach – Employing qualitative research with an ethnographic approach, this study gathered primary data from interviews with Javanese women traders at the Karangawen traditional market, who have children aged 0–8 years. Data collection methods included semi-structured interviews, observations, and documentation. This was followed by a descriptive analysis of the findings. Findings – The study identifies three main motives for Javanese women trading in traditional markets: self-actualization, economic needs, and the pursuit of independence. Additionally, the study reveals various aspects of parenting practices among Javanese women. These include practices such as bancaan weton lair, weton lair fasting, and infant massage. Research implications/limitations – The research is constrained to a descriptive analysis, focusing on a limited data set regarding the roles of Javanese women as traders in the public sphere and as mothers in the domestic sphere. Practical implications – The study highlights the dual role of rural women, who are active in both the public sphere (through trading) and the domestic sphere (through parenting). This dual engagement reflects the multifaceted nature of their daily lives. Originality/value – The study underscores how culture, economy, and social environment shape parenting practices among Javanese women. Paper type Research paper

Option Pricing Based on Black-Scholes Model, Monte Carlo Method and Binomial Tree Model

Contemporarily, option is one of the widely implemented underlying assets to hedge the risk of portfolio and satisfy certain trading motivation for investors. To obtain extra return based on investment, it is crucial to utilize and apply an accuracy and suitable tool to price option. On this basis, this study focused on comparing and applying different model to achieve the goal of option pricing. To be specific, the Python code was used to help make calculations and list the results, with three functions to price options with three diverse methods. This paper chose Alphabet Inc., Amazon, Meta Platforms, Spotify, Sunrun, and Tesla, Inc. and priced the options using the historical market data from July 20, 2022, to October 20, 2022. Reasonable results for each option are achieved with differences between each method, offering price ranges for the options. These results offer a guideline for applying different methods to option pricing and compare the effectiveness of the three methods.

Trader Competition in Fragmented Markets: Liquidity Supply Versus Picking-Off Risk

AbstractBy employing a dynamic model with two limit order books, we show that fragmentation is associated with reduced competition among liquidity suppliers and lower picking-off risk of limit orders. Due to these countervailing channels, the impact of fragmentation on liquidity and welfare differs with asset volatility: When volatility is high (low), liquidity and aggregate welfare in a fragmented market are higher (lower) than in a single market. However, fragmentation always shifts welfare away from agents with exogenous trading motives and toward intermediaries. We empirically corroborate our model’s predictions about liquidity. Our model reconciles the mixed results in the empirical literature.

Indifference pricing of credit default swaps in a multi-period model

Credit default swaps (CDS) are the most common type of credit derivatives used for hedging and speculative purposes in credit markets. We consider a representative risk-averse investor who has initial endowment in credit instrument and invests in traditional financial instruments. Using the utility indifference pricing approach, we construct a pricing framework for single-name CDS contracts with periodic payments in a multi-period model. Moreover, we analyze CDS buyers with different trading motives, and examine the effect of risk aversion on the indifference upfront prices and credit spreads of CDS for investors with hedging or speculative motives. In particular, our results show that speculation in the CDS market provides a potential explanation for the formation of the negative CDS-bond bases during and after the global financial crisis.

Understanding the trading motive for Australian takeover targets using structural equation modelling.

Understanding the trading motive for Australian takeover targets using structural equation modelling.

Why do Funds Make More When They Trade More?

In this paper, we introduce a conditional measure of skill, the correlation between funds’ residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is robust to different benchmarks and is mainly driven by the manager’s ability to predict a firm’s cash-flow news. This skill has short-term persistence and is distinctly related to traditional measures of performance. Importantly, consistent with Berk and Green [2004, Mutual Fund Flows and Performance in Rational Markets, Journal of Political Economy 112(6), 1269–1295] fund flows are increasing with respect to managerial skill after controlling for fund performance.

Optimal Financial Transaction Taxes

ABSTRACTThis paper characterizes the optimal transaction tax in an equilibrium model of financial markets. If investors hold heterogeneous beliefs unrelated to their fundamental trading motives and the planner calculates welfare using any single belief, a positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the planner's belief. The optimal tax can be implemented by adjusting its value until total volume equals fundamental volume. Knowledge of (i) the share of nonfundamental trading volume and (ii) the semielasticity of trading volume to tax changes is sufficient to quantify the optimal tax.

Liquidity Provision with Adverse Selection and Inventory Costs

We study one-shot Nash competition between an arbitrary number of identical dealers that compete for the order flow of a client. The client trades either because of proprietary information, exposure to idiosyncratic risk, or a mix of both trading motives. When quoting their price schedules, the dealers do not know the client’s type but only its distribution, and in turn choose their price quotes to mitigate between adverse selection and inventory costs. Under essentially minimal conditions, we show that a unique symmetric Nash equilibrium exists and can be characterized by the solution of a nonlinear ordinary differential equation.

Trading Activity in Public Real Estate Markets

Trading activity is an important characteristic of financial markets, since it is related to price discovery, volatility, and market liquidity. It is therefore of crucial importance to understand what drives trading activity in real estate markets. Here, we use a panel dataset consisting of 142 US REIT stocks observed over almost 20 years and a fixed-effects regression approach to link variation in trading activity to proxies for different trading motives (theory-motivated). The paper shows that the drivers of trading activity in real estate markets are distinct from those in the broader equity market. Proxies for portfolio rebalancing needs and liquidity trading are shown to be important trading motives in REIT markets. However, unlike in the broader equity market, difference of opinions and information-based trading motives seem to play a minor role for REIT trading activity.

An Information-based Theory of Financial Intermediation

Abstract We build a theory of financial intermediation based on the premise that some investors are better able to figure out the trade motives of their counterparties in bilateral meetings—screening experts. We solve for the equilibrium market structure and study how information asymmetries stemming from heterogeneity in screening expertise shape up the core–periphery trade structure. In particular, the core of the market is populated by screening experts: they have the largest share of trade volume, they are actively engaged in middleman activity, and trade with the most counterparties. Using transaction-level micro-data and information disclosure requirements, we provide extensive evidence consistent only with our theory of financial intermediation.

Speculation and informational efficiency in commodity futures markets

We use recent data of the CFTC to re-assess the effects of financial traders on informational efficiency in commodity futures markets. To do so, we focus on excessive volatility as a means to reflect noise in the price discovery process. We show that the role of financial traders on volatility is more complex than often assumed in the literature. Researchers should distinguish between the trading motives of market actors, as well as between increases and decreases in open interest. Several findings stand out. In particular, we find that short-term fluctuations in open interest might primarily be driven by speculators’ demand for liquidity, and that traditional speculators, as identified by the MM category of the CFTC, may be responsible for increasing volatility in several markets.

Taming the bias zoo

The success of behavioral economics has led to a new challenge: many biases offer observationally similar predictions for a targeted financial anomaly. To tame this bias zoo, we combine subjective survey responses with observational data to propose a new approach, one that is robust to question-specific biases introduced through surveys. We illustrate this approach by administering a nationwide survey of Chinese retail investors to elicit their trading motives. In cross-sectional regressions of respondents’ actual turnover on survey-based trading motives, perceived information advantage and gambling preference dominate other motives, though they are not the most prevalent biases based on survey responses.

Liquidity Provision with Adverse Selection and Inventory Costs

We study one-shot Nash competition between an arbitrary number of identical dealers that compete for the order flow of a client. The client trades either because of proprietary information, exposure to idiosyncratic risk, or a mix of both trading motives. When quoting their price schedules, the dealers do not know the client's type but only its distribution, and in turn choose their price quotes to mitigate between adverse selection and inventory costs. Under essentially minimal conditions, we show that a unique symmetric Nash equilibrium exists and can be characterized by the solution of a nonlinear ODE.

Evaluation of International Trade Finance using WPM Method

International Trade Finance For a variety of stakeholders, including importers, exporters, and trading companies, the International Trade Fund (ITF) offers a complete method of organizing complex trade transactions. From most secure to least safe, there are five main ways to pay in international trade: payment in advance, letter of credit, documented collection or draught, open account, and consignment. Trade financing enables businesses to lower the risks involved in importing or exporting products and services, promoting predictable and secure global trade. Technology disparities, variations in resource availability, variations in demand, the presence of economies of scale, and the existence of government regulations are the five fundamental drivers of international commerce. Typically, only one trade motivation is included in any trading model. The study of monetary interactions between two or more countries is known as international finance. Foreign direct investment and currency exchange rates are two topics that international finance primarily examines. The significance of international finance has grown as a result of increased globalization. The purpose of trade finance is to remove supply risk and payment risk from deals by involving third parties. Trade financing gives the exporter receivables or contractual payments, and credit can be given to the importer to fulfill their trade order. International commercial transactions and import and export activities are made easier by trade finance. Both businesses big and small can use it. to have access to many different financial products. To obtain working cash, small and medium-sized businesses use trade finance instruments. The macro-economic ties and financial exchanges between two countries are the subject of international finance, a subfield of financial economics. This area of finance includes ideas like interest rates, exchange rates, FDI, FPI, and currency in commerce. This paper is the weighted product for solving the routing decision problem Model (WPM) used. Every dynamically assign weight to criteria this proposed scheme considers the relevant valuation method for the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), Inter-American Development Bank (IDB), Asian Development Bank (ADB), and Number of transactions, Trade credit lines, Issuing banks, Confirming banks. European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), Inter-American Development Bank (IDB), and Asian Development Bank (ADB). A number of transactions, Trade credit lines, Issuing banks, and confirming banks. Inter-American Development Bank (IDB) is got the first rank whereas Asian Development Bank (ADB) has the lowest rank.

On short-term institutional trading skill, behavioral biases, and liquidity need

Are portfolio managers skilled or do they trade too much? Using a marked-to-market based “fair-value” method for measuring fund manager skill, we find that institutional managers can potentially earn +42 (+33) basis points benchmark-adjusted return before transaction costs after a holding period of four weeks on their buy (sell) trades. After transaction costs, the benchmark-adjusted return for the buy (sell) trades is +1 (-8) basis points. Pension fund managers outperform money managers. We are unable to detect evidence for overconfidence among pension fund managers over this short-horizon. In addition, we are unable to find evidence of disposition effect among mutual fund managers. Institutions tend to engage in short-term trades with holding period of four weeks (or less) despite only breaking-even or making economically insignificant (modest) benchmark-adjusted losses after round-trip transaction costs for liquidity, risk-management, or tax-minimization reasons. Among these, evidence for liquidity trading motive is the strongest.

Splitting and Shuffling: Institutional Trading Motives and Order Submissions Across Brokers

This paper studies order submission strategies by institutional investors when trading on private information. By merging institutional daily transactions with original/confidential 13F filings, I separate informed trades from uninformed ones. Informed large orders tend to be split across more brokers and over more days. While same brokers tend to work uninformed large orders over multiple days, the brokers who facilitated early parts of broken-up informed orders rarely receive the remaining parts of the same orders on later days. Institutional investors also provide camouflage for their informed orders by mixing an informed order with other uninformed orders simultaneously sent to the same broker. As a result, a higher degree of shuffling a portfolio of orders is associated with a larger share of informed trading volume. The splitting and shuffling strategies designed to conceal informed trades from brokers and other market participants tend to lower institutional trading costs, especially on informed orders.

Mixed Motives Insider Trading

If you trade securities on the basis of careful research, then you are a brilliant and shrewd investor. If you trade on the basis of a hot tip from your brother-in-law, an investment banker, then you are a criminal. What if you trade for both reasons? There is no single answer, thanks to a three-way circuit split. Some courts would forgive you according to your lawful trading motives, some would convict you in keeping with your bad motives, and some would hand the issue to the jury. Sometimes called the “awareness/use” debate or the “possession/use” debate, the proper treatment of mixed motive traders has occupied dozens of law review articles over the last thirty years. This Article demonstrates that courts and scholars have so far followed the wrong reasons to the wrong answers. Instead, this Article takes trader motives seriously, drawing on insights and solutions from the broader jurisprudence of mixed motive. This analysis generates a new legal test and demonstrates the test’s superiority.

Are bitcoin futures contracts for hedging or speculation?

The emerging interest in Bitcoin futures market has led to questions on its trading form and contribution to risk minimization. These questions are important for market participants, including hedgers and speculators. This paper addresses the possible trading motive in Bitcoin futures market in being speculation or hedging. The author first tests a model relating Bitcoin futures returns with trading volume and conditional volatility, estimated with a GJR-GARCH specification, on a full sample of daily futures prices. A robustness check is then conducted by investigating the hedging effectiveness of Bitcoin futures and the speculation-hedging ratios on individual Bitcoin futures contracts. The estimation results on Bitcoin futures contracts, spanning from December 2017 to February 2020, show a significant positive relationship between futures returns and lagged volume. The speculation-hedging measures used for Bitcoin futures contracts maturing in March, June, September, and December reveal an increasing demand for speculation. Also, the Bitcoin spot’s full-hedge and OLS-hedge strategies with Bitcoin futures provide no gain over a no-hedge strategy. The results reveal strong evidence that traders in the Bitcoin futures market are motivated by speculation rather than hedging. This further puts in evidence the existence of asymmetric information within informed traders in Bitcoin futures market, and therefore market participants would not insure their positions against Bitcoin price movements.