Are individual or institutional investors the agents of bubbles?

Investor sentiment and the risk–return relation: A two‐in‐one approach

“…The implications of this finding are twofold: To begin with, we report new evidence regarding the impact of investor sentiment on the risk-return relation to this literature, and in addition, based on our results, we document the importance of the inclusion of the two investor-type sentiments, thereby offering a new empirical framework to this literature. Overall, both our market-and firm-level tests support the destabilizing impact of sentiment on the risk-return relation, thus failing to support the view in Bohl et al (2009) that institutional investors might serve to counter retail investor sentiment, while supporting findings in Chelley-Steeley et al (2019) that institutional investors may trade on retail investor sentiment, and more widely, in Hart and Kreps (1986), Lakonishok et al (1991), Allen and Gorton (1993), Shleifer and Vishny (1997), Brunnermeier and Nagel (2004), Stein (2009), Hong et al (2012), Choi et al (2015), and Cao et al (2017) that institutional investors may destabilize stock markets. Thus, market inefficiency, as evidenced here by distortion of the risk-return tradeoff, or instability, is more likely to be caused by the two investor types jointly, rather than in isolation.…”

COVID caused a negative bubble. Who profited? Who lost? How stock markets changed?

“…This paper's primary contribution is to provide case-based evidence to answer the question ‘who are agents of negative bubbles?’. Using Korean data, but based only on the sign of feedback trading with no attempt to identify bubbles, Choi et al (2015) suggest that institutional investors, rather than individuals, are agents of bubbles. Using worldwide data on a well-identified negative bubble, we provide direct evidence that bubble-formations develop with institutional investors responding to significant new information (where response may be reinforced due to client flows), whereas self-trading individuals tend to counteract thanks to their contrarian behavioral traits.…”

The Capitalization Effect of Imputation Credits on Expected Stock Returns

“…7 Frijns et al (2013) argue that risk tolerance is a cultural trait and there is a relationship between culture and financial market characteristics. Choi et al (2015) find that the difference in investor behaviour is attributable to stock size as much as to investor traits. Bodnaruk and Ostberg (2009) develop a theoretical model linking idiosyncratic risk to investors' risk aversion.…”

“…Choi et al . (2015) find that the difference in investor behaviour is attributable to stock size as much as to investor traits. Bodnaruk and Ostberg (2009) develop a theoretical model linking idiosyncratic risk to investors’ risk aversion.…”