Trading Activity Of Investors Research Articles

I will trade, just not today: Individual investor trading activity around birthdays

AbstractIn this paper we provide new evidence of investor inattention by showing that personal occurrences such as birthdays are able to drive attention away from the stock market. We document that individual investors significantly reduce their trading activity in the 3 days around their birthday. The reduction in the propensity to trade is larger for more active traders, in the event of a decade birthday and when this celebrative event falls on a Friday. Results are robust to analyses focusing only on days when investor attention should be at its peak, as expressed by excess news coverage and trading volumes.

Momentum and individual investor trades: Evidence from Singapore

This paper examines the role of retail investor trading activity on stock price momentum. We find that there is little evidence of momentum for stocks traded on the Singapore Exchange (SGX) unconditionally and momentum is concentrated in stocks with high market capitalization and high nominal prices. While these stocks are likely to be the trading habitat of institutional investors, they exhibit substantially greater price momentum when they are accompanied by heavy trading by retail investors. Moreover, contrarian trading by retail investors on momentum stocks increases stock price underreaction to information and generates momentum of above 2% per month.

The turn-of-the-month effect and investor trading activities in the KOSDAQ stock market

The turn-of-the-month (TOM) effect is observed as one of the seasonalities in many markets. The author examines the TOM effect in the KOSDAQ market and finds that the effect is significant. The TOM effect in the KOSDAQ market is not due to size, turn-of-the-year, turn-of-the-quarter or index rebalancing effect. The author also finds that individual and institutional traders do not trade and buy more stocks at the TOM than on the rest days, not consistent with existing explanations of the increased liquidity by individual investors or institutional window-dressing activity. When the author investigated the net buying volume and net turnover of each investor, the net volume and turnover of individual investors at the TOM were significantly lower than those on the other days, rejecting the hypothesis of their increased demand. Interestingly, net foreign volumes at the TOM are significantly higher than on the other days. Finally, using panel regressions, the author finds that stocks with a higher net buying volume of foreigners for the TOM period tend to have higher returns, while stocks with a higher net buying volume of individual traders for the TOM period are likely to have lower returns. The results confirm that the TOM effect is not due to the increased demand of individual investors. Instead, higher net buying volume by foreigners may partially cause the TOM effect. Therefore, this study contributes to the literature by revealing the presence of the TOM effect in the KOSDAQ market and the foreign role in the anomaly in the market even mainly traded by retail investors.

The informativeness of brokerage reports: Privately-circulated versus publicly-disseminated news

Using the brokerage analyst reports released from 2014 to 2019, this paper examines the effects of the information role of brokerage firms and the information transmission role of the media on investor trading activity in the Taiwan stock market. Trading activity in the market can be categorized by investor types, including retail investors and institutional investors (foreign institutions, mutual funds, and broker dealers). This paper reviews the “buy the rumor, sell the news” trading strategy, which refers to institutional investors acting as early-informed traders and exhibiting short-term profit-taking characteristics. Notably, mutual funds have the best informational advantage among institutional investors, whose trading activities are significantly and positively related to the abnormal returns around the release of brokerage reports. On the other hand, retail investors may follow the trading activity of institutional investors without making a significant profit. The empirical findings are robust to include several firm and market characteristics. Overall, the empirical results provide in-depth insights into the regulation of brokerage analyst report disclosures.

Does stock market liberalization improve stock price efficiency? Evidence from China

AbstractIn this study, we examine whether liberalization of the stock market improves stock price efficiency using China's market liberalization pilot program as a shock. We find that investible firms exhibit a significant increase in price efficiency, as proxied by stock price non‐synchronicity, after stock market liberalization. The results are robust to a series of tests and remain unchanged after we address the issue of endogeneity. We identify two channels through which price efficiency can be improved: better disclosure by firms and the incorporation of more information into stock prices through the trading activities of foreign investors. We also find that investment becomes more sensitive to prices, further indicating that stock prices have become more efficient. Finally, we find that stock price informativeness also increases.

Negative WTI Price: What Really Happened and What Can We Learn?

The price of West Texas Intermediate futures contracts fell into the negative on April 20, 2020. In this article, I investigate underlying factors that contributed to the negative price and propose rule changes. I begin with the causes: first, because of the COVID-19 pandemic and an oil price war, an oil oversupply and storage shortage put significant downward pressure on oil prices; second, CME Group made policy changes in early April allowing negative prices; third, heterogeneous trading activities of retail investors and speculators contributed to the negative price on April 20. To improve market efficiency and fairness for market participants, I propose rule changes, such as more advance notice for market rule changes, robust alternatives for settlement price construction, and appropriate limit on trade-at-settlement contracts.

An Examination of the Weekdays’ Anomaly in the Trading Behavior of Institutional Investors in the Post-Demonetization and GST Regime in India

This study analyzed the trading activities of foreign portfolio investors (FPIs) and Indian mutual funds (IMFs) across weekdays. The present study aimed to enrich the literature related to the efficient market hypothesis and day-of-the-week anomaly present in the trading behavior of FPIs and IMFs across weekdays. The study examined the daily purchasing, selling, and net investing activities of FPIs and IMFs in equity instruments of the Indian capital market for 3.1 years, beginning November 1, 2016 and ending November 30, 2019. During this period, the Indian capital markets adjusted to the up-and-down sentiments of market players in the context of demonetization and GST regimes. This study aimed to achieve two objectives, that is, examining the day-of-the-week effect on trading activities of FPIs and IMFs and comparing the trading patterns of FPIs and IMFs on individual trading days with the rest of the weekdays with the help of autoregressive dummy variable regression, ANOVA, and independent-sample t - test. It was empirically determined by the present study that there was a day-of-the-week effect present in the behaviors of both foreign and domestic institutional investors. Monday, Thursday, and Friday were ascertained to have the most significant impact on the trading activities of institutional investors. Hence, individual investors can avail the opportunities to reap extraordinary returns from the Indian capital markets by closely monitoring institutional investors’ trading activities.

Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data

Abstract We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about one-third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility. (JEL G11, G12, G14, G15)

Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data

We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about a third of the trades' potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility.

Idiosyncratic volatility, option-based measures of informed trading, and investor attention

We establish a direct link between sophisticated investors in the option market, private stock market investors, and the idiosyncratic volatility (IVol) puzzle. To do so, we employ three option-based volatility spreads and attention data from Google Trends. In line with the IVol puzzle, the volatility spreads indicate that sophisticated investors indeed consider high-IVol stocks as being overvalued. Moreover, the option measures help to distinguish overpriced from fairly priced high-IVol stocks. Thus, these measures are able to predict the IVol puzzle’s magnitude in the cross-section of stock returns. Further, we link the origin of the IVol puzzle to the trading activity of irrational private investors as the return predictability only exists among stocks that receive a high level of private investor attention. Overall, our joint examination of option and stock markets sheds light on the behavior of different investor groups and their contribution to the IVol puzzle. Thereby, our analyses support the intuitive idea that noise trading leads to mispricing, which is identified by sophisticated investors and exploited in the option market.

High-frequency volatility modeling: A Markov-Switching Autoregressive Conditional Intensity model

We develop a Markov-Switching Autoregressive Conditional Intensity (MS-ACI) model with time-varying transitional probability, and show that it can be reliably estimated via the Stochastic Approximation Expectation–Maximization algorithm. Applying our model to high-frequency transaction data, we detect two distinct regimes in the intraday volatility process: a dominant volatility regime that is observable throughout the trading day representing the risk-transferring trading activity of investors, and a minor volatility regime that concentrates around market liquidity shocks which mainly capture impacts of firm-specific news arrivals. We propose a novel daily volatility decomposition based on the two detected volatility regimes.

Anticipatory Trading Against Distressed Mega Hedge Funds

We examine the trading activity of institutional investors when mega hedge funds (MHFs) experience financial distress. In anticipation of a 1% drop in stock ownership by distressed MHFs next quarter, other institutions reduce their stock ownership of the same stocks by 1.79% in the current quarter. A one standard-deviation higher measure of anticipatory trading predicts 1.57% per year lower abnormal equity portfolio returns for distressed MHFs. Stocks that are anticipated to be sold by distressed MHFs experience negative abnormal returns and subsequent return reversals. We conclude that institutional investors front-run the distressed trades of MHFs and destabilize stock prices.

I’ll trade, just not today: Individual investor trading activity around birthdays

In this paper we provide new evidence of investor inattention by showing that personal occurrences such as birthdays are able to drive attention away from the stock market. We document that individual investors significantly reduce their trading activity in the three days around their birthday. The reduction in the propensity to trade is larger for more active traders, in the event of a decade birthday and when this celebrative event falls on a Friday. Results are robust to analyses focusing only on days when investor attention should be at its peak, as expressed by excess news coverage and trading volumes.

The contrarian strategy of institutional investors in Chinese stock market

Employing quarterly data of the change in institutional investors’ ownership, we investigate institutional behavior in Chinese stock market. The empirical results show that Chinese institutional investors generally adopt contrarian strategy, which is inconsistent with most studies. In particular, institutional investors are more inclined to show contrarian trading behavior in up markets. Furthermore, we find that the trading activities of institutional investors can positively predict future stock returns.

Has financial attitude impacted the trading activity of retail investors during the COVID-19 pandemic?

Financial attitude influences the financial behavior of retail investors. Although the extant research has acknowledged and examined this relationship, the measures of financial attitude and behavior still vary widely and are generally posed as a series of questions rather than statements. In addition to this, there is insufficient knowledge regarding retail investors' behavior in the face of a health crisis, such as the current COVID-19 pandemic. This study addresses these gaps in the prior literature by examining the relative influence of six dimensions of financial attitude, namely, financial anxiety, optimism, financial security, deliberative thinking, interest in financial issues, and needs for precautionary savings, on the trading activity of retail investors during the pandemic. Data were collected from 404 respondents and analyzed using the artificial neural network (ANN) method. The results revealed that all six dimensions had a positive influence on trading activity, with interest in financial issues exerting the strongest influence, followed by deliberative thinking. The study thus contributes important inferences for researchers and managers.

Cross-Regional Differences in News Tone and Local Stock Ownership

This study examines cross-regional differences in news tone for the same news event and relates it to local stock ownership of individual investors using a combination of detailed investor and media data. The results show that news tone amplifies the overall attention effect and decreases the difference between the trading activities of local and nonlocal investors when locally sourced news is republished across regions. In general, trading activity decreases for given republished news, but it still exists because the same news event garners attention as it diffuses to other regional outlets in a different news tone. Overall, individual investors seem to realize that the news is stale but expect subsequent price reversals following the republished news, thus showing news-contrarian trading behavior. Furthermore, they distinguish good firms from bad firms, indicating that adverse selection is partially responsible for the observed news-contrarian trading behaviors. This paper was accepted by David Simchi-Levi, finance.

Tracking Spillovers During the Taper Tantrum: Evidence from Institutional Investor Transactions in Emerging Markets

In this report, we study the mid-2013 taper tantrum—a market event comprised of a series of policy communications from the Federal Reserve that contributed to sharp volatility across global asset prices—as a case study to shed light on a widely-referenced monetary policy shock. Our research documents and analyzes the trading activity of institutional investors to provide policymakers and researchers with a picture of the interplay between market price movements and investor behavior. The work is motivated by the growing importance of unconventional monetary policy and the role of the market participants in transmitting such signals across markets. We use proprietary data that includes global financial markets transactions (foreign exchange and government bond trades) executed by all types of institutional investors, made available by the Markets Division of J.P. Morgan’s Corporate & Investment Bank. We find that flows of institutional investors have substantial explanatory power for EM currency performance. In particular, the extent of EM currency depreciation during the taper tantrum is correlated with the trading activity of a relatively small set of hedge funds and banks associated with momentum, as well as asset managers that do not typically exhibit systematic behavior. During the taper tantrum, asset manager net flows became increasingly correlated with changes in EM currencies and the net flows of certain banks and hedge funds, reflecting potential herding behavior that had a significant impact on prices. We also find evidence of a time-varying relationship between net flows and EM currency price action consistent with a larger impact of net flows amid the rise in market volatility over the period. Our findings illustrate how private investor trading activity can be an important, but difficult-to-predict, component in monetary policy transmission mechanism. Central banks should continue to advance their understanding of how policy measures designed to influence market prices also affect the behavior of market participants.

Investor Attention and Merger Announcements

This article analyzes investor attention around merger announcements and its impact on price reactions and investor trading activity. The authors find that (1) investor attention to target firms increases significantly during the preannouncement period, especially when merger-related news are present; (2) investor attention to both acquirer and target firms increases on the announcement day but increases more for the target firms and large deals; and (3) stock return and abnormal trading volume responses related to announcement are more pronounced when investor attention is higher. Overall, the results suggest that investors anticipate merger announcements and that investor attention affects how investors incorporate information into asset prices.

Investor sentiment, trading activity and effect of the open-market share repurchase based on firm characteristics

ABSTRACT This study realises that before and after disclosure of repurchase information of share repurchasing firms, there are significant differences in investor sentiment towards the repurchasing stock. With repurchase information, repurchasing firms attempt to reduce negative investor sentiment towards the firms, thereby supporting the sentiment change motivation hypothesis. In addition, this study demonstrates that relationship between investor sentiment and stock returns differs according to investor groups. Margin trading investors, in particular, have irrational investor sentiment on share repurchase events. Finally, firm characteristics that support share repurchase influence the relationship between investor sentiment and cumulative abnormal returns in the study period.

A rare move: The effects of switching from a closing call auction to a continuous trading

AbstractThis study investigates the effects of switching to a closing continuous trading (CCT) on market quality, while considering the trading behaviors of different types of traders. Investors become more patient in the period preceding the last trading phase, which reduces the bid–ask spread (BAS) in that period. We find an increase in the BAS and volatility during the last trading phase, due to diminishing investor patience. Market volatility and the closing pricing errors relate positively to the trading activities of foreign institutional investors. Overall, the introduction of the CCT worsens the market quality before the closing.