Individual Investor Trading and Stock Returns

Abstract

This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy.FOR A VARIETY OF REASONS, financial economists tend to view individuals and institutions differently. In particular, while institutions are viewed as informed investors, individuals are believed to have psychological biases and are often thought of as the proverbial noise traders in the sense of Kyle (1985) or Black (1986). One of the questions of interest to researchers in finance is how the behavior of different investor clienteles or their interaction in the market affects returns. In this paper we focus on the interaction between individual investors and stock returns.Specifically, we examine the short-horizon dynamic relation between the buying and selling by individuals and both previous and subsequent returns using a unique data set provided to us by the NYSE. The data set was constructed from the NYSE's Consolidated Equity Audit Trail Data (CAUD) files that contain detailed information on all orders that execute on the exchange. For each stock on each day we have the aggregated volume of executed buy and sell orders of individuals. This information enables us to create a measure of net individual investor trading.We examine the extent to which intense net buying or selling by individuals in a stock is related to the stock's past returns and the extent to which such intense net trading by individuals predicts future returns. Consistent with earlier * Ron Kaniel is from the Fuqua School of Business, Duke University. Gideon Saar is from the 274The Journal of Finance studies, we find that individuals tend to buy after prices decrease and sell after prices increase. The mean market-adjusted return in the 20 days prior to a week of intense individual selling is 3.15%, while that prior to a week of intense individual buying is −2.47%. More interestingly, we find that the trades of individuals can be used to forecast future returns. Specifically, we find that stocks experience statistically significant excess returns of 0.80% in the 20 days following a week of intense buying by individuals, and −0.33% following a week of intense individual selling.Although this paper considers several potential explanations for this finding, the one that best explains our findings is that the contrarian tendency of individuals leads them to act as liquidity providers to institutions that require immediacy. Following Stoll (1978), Miller (1988), andCampbell, Grossman, andWan...

Institutional and individual sentiment: Smart money and noise trader risk?

“…Kaniel, Saar andTitman, 2005, Griffin, Harris andTopaloglu, 2005) we expect sentiment of individuals to have a different effect than sentiment of institutions.…”

“…Since many researchers view individuals as the proverbial noise traders (Kaniel, Saar and Titman, 2005) it implies that individual sentiment forecasts returns negatively, i.e. higher individual sentiment implies lower expected returns since asset price eventually come back to their fair values.…”

Who Moves Stock Prices? Monthly Evidence

“…1 A well known starting point for this literature is the documentation that individual owners tend to trade too often (Barber and Odean, 2000). Kaniel, Saar, and Titman (2005) show that at high frequency individual traders tend to be contrarians. Similar findings is shown by Jackson (2003) using Australian data.…”

Thought and Behavior Contagion in Capital Markets

“…For example, individual investors buying and selling in tandem could result from some other group of investors such as mutual funds buying and selling in tandem, influencing prices. If individual investors supply liquidity to institutions by trading as contrarians in response to price movements (as found by Kaniel, Saar, and Titman (2008)), they will tend to trade together.…”