Investor preferences and portfolio selection: is diversification an appropriate strategy?

This paper analyzes the relationship between diversification and several distributional characteristics that have risk implications for stock returns. We develop a flexible three-parameter distribution to model the stock returns. Using data on the current 30 DJIA stocks, we show that an investor's strategy on diversification depends on the measures of risk for particular concerns. For example, investors who desire to increase positive skewness would hold a less diversified portfolio, while those who care more about extreme losses would hold a more diversified portfolio. Experimenting with a more general pool of stocks yields the same conclusions.     

Optimal tax-timing and asset allocation when tax rebates on capital losses are limited

This article studies the portfolio problem with realization-based capital gain taxation when limited amounts of losses qualify for tax rebate payments, as is the case under current US tax law. When the tax rate applicable to realized losses exceeds that on realized capital gains, it can be optimal to realize capital gains immediately and pay capital gain taxes to regain the option to use potential future losses against a higher tax rate. This incentive adds an entirely new and as yet unstudied dimension to the portfolio problem. It causes risk averse investors to hold more equity and attain higher welfare levels than is the case when trading under a tax system that seeks to collect the same amount of taxes, but does not allow for tax rebate payments. This is because the benefit to these investors from having their losses subsidized is greater than the suffering from having profits taxed at a higher rate.     

Are paper winners gamblers? Evidence from Australian retail investors

This study examines stock market gambling using a comprehensive set of investor characteristics and past portfolio performance measures. We find that retail investors overinvest in ‘lottery stocks’, stocks with gambling‐like properties. Significant portfolio underperformance is the result of gambling through lottery stocks. Investors are more likely to gamble following recent portfolio paper gains, regardless of realised performance, providing new evidence that paper gains trigger a house money effect. Investors trading greater values or holding more stocks, and older and female investors, are less likely to invest in lottery stocks.     

High Idiosyncratic Volatility and Low Returns: A Prospect Theory Explanation

The well‐documented negative relationship between idiosyncratic volatility and stock returns is puzzling if investors are risk‐averse. However, under prospect theory, while investors are risk‐averse in the domain of gains, they exhibit risk‐seeking behavior in the domain of losses. Consistent with risk‐seeking investors’ preference for high‐volatility stocks in the loss domain, we find that the negative relationship between idiosyncratic volatility and stock returns is concentrated in stocks with unrealized capital losses, but is nonexistent in stocks with unrealized capital gains. This finding is robust to control for short‐term return reversals and maximum daily return, among other variables.     

Loss aversion,asymmetric market comovements,and the home bias

Loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion. The intuition is that the first-order-different utility impact of wealth gains and losses leads loss-averse investors to behave similarly to investors with high risk aversion. But if so, should those agents not perceive larger gains from international diversification than standard expected-utility investors with plausible levels of risk aversion? They might not, because comovements in international stock markets are asymmetric: correlations are higher in market downturns than in upturns. This asymmetry dampens the gains from diversification relatively more for loss-averse investors. We analyze the portfolio problem of such an investor who has to choose between home and foreign equities in the presence of asymmetric comovement in returns. Perhaps surprisingly, in the context of the home bias puzzle we find that loss-averse investors behave similarly to those with standard expected-utility preferences and plausible levels of risk aversion. We argue that preference specifications that appear to perform well with respect to the equity premium puzzle should be subjected to this “test”.     

我国基金重仓股选股偏好的时期似无关回归分析

基于基金重仓股季度面板数据,本文采用时期似无关回归模型分析了四大类共28个指标对基金持股比例的影响,并利用基金重仓股的统计值特点发现基金筛选股票的标准。研究结果表明,基金确实在寻求价值型投资,扩大基金规模可减轻股市投机行为;基金在调研阶段和操盘阶段对风险有不同的偏好,调研阶段规避风险,操盘阶段偏好高风险高回报;基金偏爱长期流动性好的股票;开放式基金的选股要求高于封闭式基金,牛市时基金的选股要求高于熊市;基金偏爱关注率高、信息丰富的股票;基金对行业的偏好基于行业的业绩表现;基金重仓股持股比例基本上与指数有相似的变化趋势。     

Direct evidence of dividend tax clienteles

The paper is the first to evaluate the dividend tax clientele hypothesis using a data set of all domestic stock portfolios in the market. We find that investment funds that face a higher effective tax rate on dividend income than on capital gains tilt their portfolios away from dividend-paying stocks. These investors consequently earn a dividend yield that is about 35 basis points lower than that of investors who are tax neutral between dividends and capital gains (pension funds, unit-linked insurance, life insurance). Consistent with tax rules and charter provisions, we also find that private corporations prefer growth stocks, that foundations exhibit strong dividend preferences, and that partnerships rarely hold stocks portfolios.     

Institutional investors: Arbitrageurs or rational trend chasers

This paper studies the relationship between institutional investor holdings and stock misvaluation in the U.S. between 1980 and 2010. I find that institutional investors overweigh overvalued and underweigh undervalued stocks in their portfolio, taking the market portfolio as a benchmark. Cross-sectionally, institutional investors hold more overvalued stocks than undervalued stocks. The time-series studies also show that institutional ownership of overvalued portfolios increases as the portfolios' degree of overvaluation. As an investment strategy, institutional investors' ride of stock misvaluation is neither driven by the fund flows from individual investors into institutions, nor industry-specific. Consistent with the agency problem explanation, investment companies and independent investment advisors have a higher tendency to ride stock misvaluation than other institutions. There is weak evidence that institutional investors make a profit by riding stock misvaluation. My findings challenge the models that view individual investors as noise traders and disregard the role of institutional investors in stock market misvaluation.     

中国个人投资者处置效应研究——一个非理性信念的视角

处置效应是指投资者过早卖出盈利股票而长期持有亏损股票的现象。大量文献表明金融市场投资者存在显著的处置效应,但其产生的原因和机理存在争议。本文在前景理论框架下,构建了包含投资者非理性预期的离散时间投资组合决策模型,发现处置效应随投资者情绪升高而减弱。本文使用我国某券商2007—2009年近177万个人投资者股票账户的交易数据进行了实证分析,得到与理论模型预测的一致结果,即投资者情绪与投资者处置效应之间呈现显著的负相关关系。而且,受情绪影响,投资者处置效应在估值难度较大的股票中更弱。本文结论对理解投资者处置效应、优化投资者卖出决策和加强资本市场基础制度建设具有一定理论和实践意义。     

The performance of individual investors in structured financial products

This paper is the first to measure individual investors’ realized risk-adjusted performance in structured financial products, which represent one of the key financial innovations in recent times. Based on a large database of trades and portfolio holdings for 10,652 retail investors in discount and bonus certificates and common stocks, we find that (1) investors typically realize negative alphas in structured financial products, even when transaction costs are ignored. (2) Their underperformance increases with product complexity, which results from the higher implicit price premiums charged by the issuing banks for the more complex products and from the investors’ poor selection of products that have complex payoff specifications. (3) Investors also make poor choices when selecting the underlying assets for their structured product investments. This is merely a reflection of the poor stock selection abilities which also leads to a significant underperformance for their equity portfolios. (4) Certificate and stock investors are prone to the disposition effect. Overall, these findings suggest that retail investors may require some form of protection to avoid incurring these losses.     

Religious beliefs, gambling attitudes, and financial market outcomes

This study investigates whether geographic variation in religion-induced gambling norms affects aggregate market outcomes. We conjecture that gambling propensity would be stronger in regions with higher concentrations of Catholics relative to Protestants. Consistent with our conjecture, we show that in regions with higher Catholic–Protestant ratios, investors exhibit a stronger propensity to hold lottery-type stocks, broad-based employee stock option plans are more popular, the initial day return following an initial public offering is higher, and the magnitude of the negative lottery-stock premium is larger. Collectively, these results indicate that religion-induced gambling attitudes impact investors' portfolio choices, corporate decisions, and stock returns.     

Which past returns affect trading volume?

Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.     

When do investors gamble in the stock market?

Recent studies have uncovered gambling-motivated trading activities in financial markets in which investors seek lottery-type payoffs by using financial assets. Building on prospect theory, this study provides an important complement to prior research and investigates what period that investors make gambling-motivated trading in the stock market. Examining data from the Chinese stock market, investors are revealed to have asymmetric gambling preferences in gain and loss domains. Investors' gambling motivations are more easily triggered when the market is experiencing a loss. In such periods of time, investors may preferentially opt for lottery-type stocks that offer them a small chance to earn an extreme return at the risk of a likely small loss, simply due to their ‘aversion to a sure loss’.     

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.     

Do Individual Investors Have Asymmetric Information Based on Work Experience?

Using a novel data set covering all individual investors' stock market transactions in Norway over 10 years, we analyze whether individual investors have a preference for professionally close stocks, and whether they make excess returns on such investments. After excluding own‐company stock holdings, investors hold 11% of their portfolio in stocks within their two‐digit industry of employment. Given the poor hedging properties of such investments, one would expect abnormally high returns. In contrast, all estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for the excessive trading in professionally close stocks.     

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.     

Preferred risk habitat of individual investors

The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995–2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the returns of stocks within each portfolio have remarkably similar volatilities, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk-averse customers indeed hold less volatile stocks. Greater volatility specialization is associated with lower Sharpe ratios, primarily because more specialized investors hold fewer stocks and thereby expose themselves to more unsystematic risk.     

Momentum and Foreign Investors: Evidence from the Korean Stock Market

Abstract:

We examine whether the price impact of foreign investors on the Korean stock market from December 2000 to February 2007 generated a momentum phenomenon. In our empirical results, foreigners seem to have exerted a significantly positive impact on prices in “up” markets (periods of positive stock returns), but have had little impact on prices in “down” markets (periods of negative returns). We document that the impact of foreigners’ trades is concentrated in large companies. Most importantly, when the market is in the up state, the returns of stocks of large companies that were positively affected by foreign investors in the previous six-month period continue to increase in the subsequent six-month period. As a result, the subsequent six-month return on a past “winner” stock portfolio is significantly higher than that on a past “loser” stock portfolio. This brings to mind a momentum phenomenon that has been reported not to exist in the Korean stock market.     

Lottery stocks and stop-loss rules

We show that stop-loss rules increase the returns to investment in stocks with lottery features. These stocks typically have sporadic big gains and frequent small losses. However, stop-loss rules can reduce losses and allow investors to receive the gains from large price increases. We also highlight that sell signals of popular technical rules resemble stop-loss rules and are effective at increasing risk-adjusted returns for lottery stock. These rules could have helped investors avoid losses from major historical drawdowns, are particularly beneficial in declining markets, and are robust to the inclusion of transaction costs.     

Some consequences of banks' LDC loans: A note

The realized returns on LDC loans made prior to 1980 and hypothetically sold at (below par) secondary market prices in either 1986, when a secondary market first began, or, say, in 1989 are moderately positive. The realized risk-adjusted returns to investors on a portfolio of large LDC lending bank stocks are unmistakenly lower than the return on a broad market index, though they are not significantly so. Similarly, although the difference is not statistically significant, the average realized return on LDC lending banks' stocks is well below that of a portfolio of non-LDC lending banks. The article concludes that while shareholders suffered economic losses as a result of LDC lending activity, these losses were not quantitatively large.