(Un)skilled leveraged trading of retail investors

We study the trading behavior of retail investors in the market of leveraged bank-issued retail derivatives, which are designed to encourage excessive trading and speculation. We investigate whether retail investors have private information and benefit disproportionately or whether they gamble without private information. We answer this question along three dimensions: (i) profitability, (ii) news trading, and (iii) transaction costs. We distinguish between derivatives by the type of underlying (index vs. individual stocks). We find that raw returns are negative for derivatives with stocks as the underlying, and only partially positive for those with index as the underlying. Nevertheless, risk-adjusted returns show poor performance, with Sharpe ratios below 0.30. We show that retail investors are attracted by news, but do not have private information prior to news events.     

Revealed stock preferences of individual investors: Evidence from Chinese equity markets

We examine the stock preferences of Chinese individual investors as revealed by their executed trades. Results show that their stock preferences vary with wealth levels. Wealthier individuals prefer stocks with high liquidity and volatility, greater state-ownership, high growth potential, and strong past performance. Less wealthy individuals, however, prefer stocks with high beta, high liquidity, poor past performance, low price, and small capitalization. Overall, the investment choices of Chinese individual investors do not necessarily suggest only behavioral biases as existing studies might have implied, but instead, they reveal to some extent the rational investing behavior of Chinese individual investors.     

Predictable behavior, profits, and attention

Stocks in the Shanghai market that hit upper price limits typically exhibit three characteristics: high returns, high volumes, and news coverage. We show that these price limit events attract investors' attention. Attention-grabbing events lead active individual investors to buy stocks they have not previously owned. Consistent with lowering investor search costs, events that affect a few (many) stocks lead to increased (decreased) buying. Upper price limit events coincide with initial price increases followed by statistically significant price mean reversion over the following week. Rational traders (statistical arbitrageurs) profit in response to attention-based buying. Smart traders accumulate shares on date t, sell shares on date t + 1, and earn a daily average profit of 1.16%. We show the amount they invest predicts the degree of attention-based buying by individual investors. We end by decomposing individual investor trades in order to estimate losses attributable to behavioral biases.     

投资者关注与分析师评级漂移——来自中国股票市场的证据

本文使用一个直接源自于投资者行为的新颖变量——财经互动社区的超额发帖量——作为投资者关注的代理变量,发现投资者关注可以用来解释分析师评级的漂移现象,即针对分析师评级变动,股价的立即反应随着投资者关注的增加而增强,股价的漂移随着投资者关注的增加而减弱,同时发现投资者关注对股票交易量具有显著正向的作用。     

Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea

We investigate whether domestic investors have an edge overforeign investors in trading domestic stocks. Using Korean data,we show that foreign money managers pay more than domestic moneymanagers when they buy and receive less when they sell for mediumand large trades. The sample average daily trade-weighted disadvantageof foreign money managers is 21 basis points for purchases and16 basis points for sales. There is also some evidence thatdomestic individual investors have an edge over foreign investors.The explanation for these results is that prices move more againstforeign investors than against domestic investors before trades.     

投资者关注度与股票市场——以PM2.5概念股为例

近年来雾霾成为中国社会的热点话题,而雾霾频发导致PM2.5概念股受到投资者广泛的关注。本文结合现实环境问题,研究投资者通过对环境的关注度继而对与环境相关的股票的影响。具体而言,本文探究投资者对雾霾和PM2.5概念股的关注度对PM2.5概念股的影响。分析发现投资者对雾霾和PM2.5概念股的关注度的增加能拉升PM2.5概念股的股价。投资者对雾霾的关注度和PM2.5概念股的收益率显著正相关。关注度的增加同时也提高PM2.5概念股交易的活跃程度以及PM2.5概念股涨停的可能性。此外,本文发现正面的新闻报道会拉升PM2.5概念股的股价而负面的新闻报道会降低其股价。最后,本文通过讨论内生性和异质性等一系列稳健性检验进一步验证上述结论。     

When does attention matter? The effect of investor attention on stock market volatility around news releases

We empirically investigate how retail and institutional investor attention is related to the way stock markets process information. With a focus on 360 US stocks in the S&P 500 universe, our results show that higher retail investors’ attention around news releases increases the post-announcement stock return volatility, whereas institutional investor attention has a small but negative impact on volatility on days following news releases on average over the cross-section of companies. These findings are in line with the hypotheses that attention of retail investors slows price-adjustments to new information and attention of institutional investors results in the opposite reaction. We show that these effects are heterogeneous in the type of news and the topic of the information being released. A portfolio allocation application highlights that these results are not only statistically significant but also sizeable in economic terms and can lead to an overperformance as large as dozens of basis points.     

Left-tail momentum: Underreaction to bad news,costly arbitrage and equity returns

This paper documents a significantly negative cross-sectional relation between left-tail risk and future returns on individual stocks trading in the US and international countries. We provide a behavioral explanation to this anomaly based on the idea that investors underestimate the persistence in left-tail risk and overprice stocks with large recent losses. Thus, low returns in the left-tail of the distribution persist into the future causing left-tail return momentum. We find that the left-tail risk anomaly is stronger for stocks that are more likely to be held by retail investors, that receive less investor attention, and that are costlier to arbitrage.     

Performance Attribution of US Institutional Investors

Institutional investors play a prominent role in today's markets. Quarterly reported portfolio holdings make it possible to evaluate the risk-adjusted equity investment performance of all institutional investors in the United States during 1981–2002. The results indicate that institutional investors have been successful in managing client assets; they have added significant value by generating excess returns after controlling for underlying portfolio risk factors. Style choice is the main factor in determining overall portfolio performance, but institutional investors also displayed significant stock selection skills during the period. The stocks they choose for their portfolios have outperformed the stocks they exclude.     

The trading behavior of institutions and individuals in Chinese equity markets

This paper employs a unique data set to analyze the trading behavior of 4.74 million individual and institutional investors across Mainland China. Results show that groups of individual investors with varying trade values (as proxies for wealth levels) engage in different trading strategies. Chinese institutions are momentum investors, while less wealthy Chinese individual investors at large are contrarian investors. The results also indicate that a small group of wealthiest Chinese individuals tend to behave like institutions when they buy stocks, and behave like less wealthy individuals when they sell. Furthermore, only the trading activities of institutions and of wealthiest individuals can affect future stock volatility, but those of Chinese individual investors at large have no predictive power for future stock returns.     

The disposition effect and investor experience

We examine whether investing experience can dampen the disposition effect, that is, the fact that investors seem to hold on to their losing stocks to a greater extent than they hold on to their winning stocks. To do so, we devise a computer program that simulates the stock market. We use the program in an experiment with two groups of subjects, namely experienced investors and undergraduate students (the inexperienced investors). As a control procedure, we consider random trade decisions made by robot subjects. We find that though both human subjects show the disposition effect, the more experienced investors are less affected.     

Hedging, Familiarity and Portfolio Choice

We exploit the restrictions of intertemporal portfolio choicein the presence of nonfinancial income risk to test hedgingusing the information contained in the actual portfolio of theinvestor. We use a unique data set of Swedish investors withinformation broken down at the investor level and into variouscomponents of investor wealth, income, and demographic characteristics.Portfolio holdings are identified at the stock level. We showthat investors do not hedge but invest in stocks closely relatedto their nonfinancial income. We explain this with familiarity,that is, the tendency to concentrate holdings in stocks to whichthe investor is geographically or professionally close or thathe has held for a long period. We show that familiarity is nota behavioral bias, but is information driven. Familiarity-basedinvestment allows investors to earn higher returns than theywould have otherwise earned if they had hedged.     

Does Noninformative Text Affect Investor Behavior?

This article demonstrates that easily processed texts affect investor trading behavior even in the absence of any informational content. We examine the trading symbols of US firms and find that stocks with clever tickers (those that are actual words in the English language) are more liquid, as measured by higher turnover and trading volume, as well as lower spreads. Furthermore, clever ticker stocks are traded more by uninformed investors and have larger market reactions on earnings announcement days. These results suggest that ticker fluency facilitates trading by improving the firm's visibility among retail investors through attention grabbing and memorization.     

The price of sin: The effects of social norms on markets

We provide evidence for the effects of social norms on markets by studying “sin” stocks—publicly traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm against funding operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, we find that sin stocks are less held by norm-constrained institutions such as pension plans as compared to mutual or hedge funds that are natural arbitrageurs, and they receive less coverage from analysts than do stocks of otherwise comparable characteristics. Sin stocks also have higher expected returns than otherwise comparable stocks, consistent with them being neglected by norm-constrained investors and facing greater litigation risk heightened by social norms. Evidence from corporate financing decisions and the performance of sin stocks outside the US also suggest that norms affect stock prices and returns.     

Differences of Opinion of Public Information and Speculative Trading in Stocks and Options

We analyze the effects of differences of opinion on the dynamicsof trading volume in stocks and options. We find that disagreementsabout the mean of the current- and next-period public informationlead to trading in stocks in the current period but have noeffect on options trading. Without options, we find that disagreementsabout the precision of all past and current public informationaffect trading in stocks in the current period. With options,only disagreements about the precisions of the next- and current-periodinformation affect stocks and options trading in the currentperiod. Our results suggest that options trading is concentratedaround information events that are likely to cause disagreementsamong investors, whereas trading in stocks may be diffusiveover many periods.     

Foreign and Local Institutional Ownership and the Speed of Price Adjustment

Abstract:  This paper examines the relation between the speed of price adjustment and stock ownership by foreign and local institutional investors using data from the Korean stock market. We show that returns of stocks with high foreign institutional ownership lead returns of stocks with low foreign institutional ownership, especially after foreign ownership restriction is lifted. Likewise, returns of stocks with high local institutional ownership lead returns of stocks with low local institutional ownership. These results support the idea that foreign institutional (local institutional) investors have faster access to or processing power of new information than local institutional (local individual) investors.     

Retail investor attention and the limit order book: Intraday analysis of attention-based trading

We are the first to examine how intraday changes in retail investor attention, measured by hourly Google searches, affect trading activity and informativeness of trades. High levels of Google search activity are followed in the next hour by more intensive trading in all stocks. The increased trading activity is initiated by retail investors as evidenced by the reduced size of new orders. After googling a company, retail investors do not become informed in the traditional sense; rather, they act as noise traders, who mistake noise for information, as their orders are picked off by truly informed traders.     

Coexistence of disposition investors and momentum traders in stock markets: experimental evidence

Prior research documents that many investors disproportionately hold on to losing stocks while selling stocks which have gained in value. This systematic behavior is labeled as the “disposition effect”. The phenomenon can be explained by prospect theory's idea that subjects value gains and losses relative to a reference point like the purchase price (PP), and that they are risk-seeking in the domain of possible losses and risk-averse when a certain gain is obtainable. Our experiments were designed to test whether individual-level disposition effects attenuate or survive in a dynamic market setting. We analyze a series of 36 stock markets with 490 subjects. The majority of our investors demonstrate a strong preference for realizing winners (paper gains) rather than losers (paper losses). We adopt different reference points and compare the behavioral patterns across three main trading mechanisms, i.e. rules of price formation. The disposition effect is greatly reduced only within high-pressure mechanisms like a dealer market (DM) when the last price (LP) is assumed as a reference point, which is a more market driven (external) benchmark. If disposition investors use the PP as a reference point, which is a more mental-accounting driven (internal) benchmark, they die hard in all market settings. Interestingly, our markets do not collapse or become illiquid by disposition investors' reluctance to trade. A main reason for this is the coexistence of two or more groups of investors, e.g. momentum traders and disposition investors.     

Continuous Trading or Call Auctions: Revealed Preferences of Investors at the Tel Aviv Stock Exchange

We use the move of Israeli stocks from call auction trading to continuous trading to show that investors have a preference for stocks that trade continuously. When large stocks move from call auction to continuous trading, the small stocks that still trade by call auction experience a significant loss in volume relative to the overall market volume. As small stocks move to continuous trading, they experience an increase in volume and positive abnormal returns because of the associated increase in liquidity. Overall, though, a move to continuous trading increases the volume of large stocks relative to small stocks.     

A Test of the Errors–in–Expectations Explanation of the Value/Glamour Stock Returns Performance: Evidence from Analysts' Forecasts

Several empirical studies show that investment strategies that favor the purchase of stocks with low prices relative to conventional measures of value yield higher returns. Some of these studies imply that investors are too optimistic about (glamour) stocks that have had good performance in the recent past and too pessimistic about (value) stocks that have performed poorly. We examine whether investors systematically overestimate (underestimate) the future earnings performance of glamour (value) stocks over the 1976 to 1997 period. Our results fail to support the extrapolation hypothesis that posits that the superior performance of value stocks is because investors make systematic errors in predicting future growth in earnings of out–of–favor stocks.