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Do Limit Orders Alter Inferences about Investor Performance and Behavior?

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  • JUHANI T. LINNAINMAA
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    Abstract

    Individual investors lose money around earnings announcements, experience poor posttrade returns, exhibit the disposition effect, and make contrarian trades. Using simulations and trading records of all individual investors in Finland, I find that these trading patterns can be explained in large part by investors' use of limit orders. These patterns arise mechanically because limit orders are price-contingent and suffer from adverse selection. Reverse causality from behavioral biases to order choices does not appear to explain my findings. I propose a simple method for measuring a data set's susceptibility to this limit order effect. Copyright (c) 2010 The American Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2010.01576.x
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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 65 (2010)
    Issue (Month): 4 (08)
    Pages: 1473-1506

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    Handle: RePEc:bla:jfinan:v:65:y:2010:i:4:p:1473-1506

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    Cited by:
    1. Grinblatt, Mark & Keloharju, Matti & Linnainmaa, Juhani T., 2012. "IQ, trading behavior, and performance," Journal of Financial Economics, Elsevier, vol. 104(2), pages 339-362.
    2. Raphael Flepp & Stephan Nüesch & Egon Franck, 2013. " Liquidity, Market Efficiency and the Influence of Noise Traders: Quasi-Experimental Evidence from the Betting Industry," Working Papers 341, University of Zurich, Department of Business Administration (IBW).
    3. Yu, Hsin-Yi & Hsieh, Shu-Fan, 2010. "The effect of attention on buying behavior during a financial crisis: Evidence from the Taiwan stock exchange," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 270-280, September.
    4. Urs Fischbacher & Gerson Hoffmann & Simeon Schudy, 2014. "The causal effect of stop-loss and take-gain orders on the disposition effect," TWI Research Paper Series 89, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
    5. Ben-David, Itzhak & Hirshleifer, David, 2011. "Beyond the Disposition Effect: Do Investors Really Like Gains More Than Losses?," Working Paper Series 2011-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Kaustia, Markku & Rantapuska, Elias, 2012. "Rational and behavioral motives to trade: Evidence from reinvestment of dividends and tender offer proceeds," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2366-2378.

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