Investor types' trading around theshort‐termreversal pattern

Abstract

Using exact and complete Korean data of investor trading, we provide an anatomy of investor types' trading throughout the short-horizon overshootingand-reversal pattern in stock returns. We document two forms of non-optimal trading behaviour associated with the pattern: First, institutional investors' chasing of return shocks at the overshooting point, particularly in the large-cap segment. Second, individual investors' buying of winner stocks in the small-cap segment, consistent with an attention-driven speculative buying bias.attention-driven buying, investor response to stock return shocks, overshooting and short-term reversals, trading flows of investor types

Individual investors’ trading behavior in Moscow Exchange and the COVID-19 crisis

“…The aggregate Russian individual investor bought the dip during the crash in March–April 2020, in unprecedented amounts. Such buying can be accounted for by individual investors’ regular contrarian trading documented in other markets (e.g., Kaniel et al, 2008 , Barrot et al, 2016 , Onishchenko and Ülkü, 2020 ), which we confirm on Russian data using a vector autoregression (VAR) analysis. However, the aggregate Russian individual investor made a key exception to contrarianism by remaining as net buyers, instead of contrarian profit-taking, until the market fully recovered.…”

“…For example, recent studies on the US individual investors are limited to a short proprietary sample provided by the NYSE ( Kaniel et al, 2008 , Kaniel et al, 2012 ) -raising questions about out-of-sample validity – or attempts to infer retail trading from statistical approximations ( Boehmer et al, 2021 ) – needing checks for validity on actual data. In contrast, several Asian exchanges have made available long time-series of exact and complete daily aggregate trading data by investor types, enabling researchers to generate concrete evidence (e.g., Kamesaka et al, 2003 , Chiang et al, 2012 , Phansatan et al, 2012 , Ülkü and Weber, 2013 , Ikizlerli et al, 2019 , Onishchenko and Ülkü, 2020 ). However, the fact that most of the existing literature is confined to Asian data leaves a gap regarding whether the findings on Asian markets are representative of investors from other national cultures.…”

“…(i) Contrarian trading: Individual investors’ aggregate net trading is negatively related to contemporaneous and past returns. This has been documented both on the cross-sectional dimension based on net buying (selling) of winner (loser) stocks ( Kaniel et al, 2008 , Onishchenko and Ülkü, 2020 ) and on the time-series dimension based on negative impulse responses of marketwide net individual trading flows to market return shocks in VARs ( Ülkü and Weber, 2013 ). Individual investors’ contrarian trading has been regarded as implicit liquidity provision to institutional price pressure, yielding positive returns on average ( Kaniel et al, 2008 , Barrot et al, 2016 ), but also potentially slowing down incorporation of new information ( Kaniel et al, 2012 , Eom et al, 2019 ).…”

“…Behavioral drivers such as the disposition effect and a belief in mean reversion (e.g., gambler’s fallacy) are can also drive the negative relationship with past returns. Onishchenko and Ülkü (2020) summarize all these effects under a single concept: “uninformed attempt to buy low and sell high using recent prices as heuristic reference points”.…”

“…Speculative buying frenzies that involve an element of positive feedback trading and herding are often attributed to individual investors in financial media and in some academic research; for example, Wang et al (2017) document underperformance following high volume of stocks dominated by individual investors in the Chinese stock market. These seemingly conflicting arguments regarding whether individual investors are positive or negative feedback traders have been reconciled by Onishchenko and Ülkü (2020) who show that individual investors are contrarian in institutional investor habitat (i.e., large-cap stocks) and exhibit attention-driven speculative positive-feedback buying (as established by Barber and Odean, 2008 ) in the small-cap segment.…”