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Individual Investors and Volatility

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Author Info

  • THIERRY FOUCAULT
  • DAVID SRAER
  • DAVID J. THESMAR

Abstract

In this paper, the authors test the hypothesis that individual investors contribute to the idiosyncratic volatility of stock returns because they act as noise traders.

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Bibliographic Info

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

Volume (Year): 66 (2011)
Issue (Month): 4 (08)
Pages: 1369-1406

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:4:p:1369-1406

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References

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  1. Solnik, Bruno, 1990. " The Distribution of Daily Stock Returns and Settlement Procedures: The Paris Bourse," Journal of Finance, American Finance Association, vol. 45(5), pages 1601-09, December.
  2. Grinblatt, Mark & Keloharju, Matti, 2000. "The investment behavior and performance of various investor types: a study of Finland's unique data set," Journal of Financial Economics, Elsevier, vol. 55(1), pages 43-67, January.
  3. Campbell, J.Y. & Kyle, A.S., 1988. "Smart Money, Noise Trading And Stock Price Behavior," Papers 95, Princeton, Department of Economics - Financial Research Center.
  4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  5. Allen, F. & Gale, D., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 2-92, Wharton School - Weiss Center for International Financial Research.
  6. Brad M. Barber & Terrance Odean, 2002. "Online Investors: Do the Slow Die First?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 455-488, March.
  7. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," The Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January.
  8. Malkiel, Burton & Campbell, John & Lettau, Martin & Xu, Yexiao, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Scholarly Articles 3128707, Harvard University Department of Economics.
  9. Dorn, Daniel & Huberman, Gur & Sengmueller, Paul, 2007. "Correlated Trading and Returns," CEPR Discussion Papers 6530, C.E.P.R. Discussion Papers.
  10. Andrade, Sandro C. & Chang, Charles & Seasholes, Mark S., 2008. "Trading imbalances, predictable reversals, and cross-stock price pressure," Journal of Financial Economics, Elsevier, vol. 88(2), pages 406-423, May.
  11. Ron Kaniel & Gideon Saar & Sheridan Titman, 2008. "Individual Investor Trading and Stock Returns," Journal of Finance, American Finance Association, vol. 63(1), pages 273-310, 02.
  12. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
  13. Frazzini, Andrea & Lamont, Owen A., 2008. "Dumb money: Mutual fund flows and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 88(2), pages 299-322, May.
  14. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
  15. Soeren Hvidkjaer, 2006. "A Trade-Based Analysis of Momentum," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 457-491.
  16. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, vol. 87(4), pages 728-37, September.
  17. Bessembinder, Hendrik & Venkataraman, Kumar, 2004. "Does an electronic stock exchange need an upstairs market?," Journal of Financial Economics, Elsevier, vol. 73(1), pages 3-36, July.
  18. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
  19. Richard K. Crump & V. Joseph Hotz & Guido W. Imbens & Oscar A. Mitnik, 2006. "Moving the Goalposts: Addressing Limited Overlap in the Estimation of Average Treatment Effects by Changing the Estimand," NBER Technical Working Papers 0330, National Bureau of Economic Research, Inc.
  20. Frank M. Song & Junxi Zhang, 2005. "Securities Transaction Tax and Market Volatility," Economic Journal, Royal Economic Society, vol. 115(506), pages 1103-1120, October.
  21. Biais, B. & Bisiere, C. & Decamps, J.-P., 1997. "Short Sales COnstraints, Liquidity and Price Discovery: An Empirical Analysis on the Paris Bourse," Papers 97.485, Toulouse - GREMAQ.
  22. Soeren Hvidkjaer, 2008. "Small Trades and the Cross-Section of Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1123-1151, May.
  23. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
  24. Scruggs, John T., 2007. "Noise trader risk: Evidence from the Siamese twins," Journal of Financial Markets, Elsevier, vol. 10(1), pages 76-105, February.
  25. Pontiff, Jeffrey, 2006. "Costly arbitrage and the myth of idiosyncratic risk," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 35-52, October.
  26. Subrahmanyam, Avanidhar, 1998. "Transaction Taxes and Financial Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 71(1), pages 81-118, January.
  27. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  28. Baker, Malcolm & Savasoglu, Serkan, 2002. "Limited arbitrage in mergers and acquisitions," Journal of Financial Economics, Elsevier, vol. 64(1), pages 91-115, April.
  29. Duffee, Gregory R., 1995. "Stock returns and volatility A firm-level analysis," Journal of Financial Economics, Elsevier, vol. 37(3), pages 399-420, March.
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Citations

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Cited by:
  1. Jung, Chan Shik & Kim, Woojin & Lee, Dong Wook, 2013. "Short selling by individual investors: Destabilizing or price discovering?," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1232-1248.
  2. Geert Bekaert & Robert J. Hodrick & Xiaoyan Zhang, 2010. "Aggregate Idiosyncratic Volatility," NBER Working Papers 16058, National Bureau of Economic Research, Inc.
  3. Gunther Capelle-Blancard & Olena Havrylchyk, 2014. "The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility," EconomiX Working Papers 2014-27, University of Paris West - Nanterre la Défense, EconomiX.
  4. Chen, Zhijuan & Lin, William T. & Ma, Changfeng & Tsai, Shih-Chuan, 2014. "Liquidity provisions by individual investor trading prior to dividend announcements: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 358-374.
  5. Erdem, Orhan & Yüksel, Serkan & Arık, Evren, 2013. "Trading Puzzle, Puzzling Trade," MPRA Paper 46804, University Library of Munich, Germany, revised 21 Feb 2013.
  6. Patrick Roger & Marie-Hélène Broihanne & Maxime Merli, 2012. "In search of positive skewness: the case of individual investors," Working Papers of LaRGE Research Center 2012-04, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
  7. Cheng, Su-Yin, 2012. "Substitution or complementary effects between banking and stock markets: Evidence from financial openness in Taiwan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 508-520.
  8. Ralf Bergheim & Jürgen Ernstberger & Michael W.M. Roos, 2014. "How Do Fair Value Measurements of Financial Instruments Affect Investments in Banks?," Ruhr Economic Papers 0487, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  9. Greenwood, Robin & Thesmar, David, 2011. "Stock price fragility," Journal of Financial Economics, Elsevier, vol. 102(3), pages 471-490.
  10. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
  11. Dimpfl, Thomas & Jank, Stephan, 2011. "Can internet search queries help to predict stock market volatility?," CFR Working Papers 11-15, University of Cologne, Centre for Financial Research (CFR).
  12. Mariusz Kicia, 2013. "Can Heuristic Valuation Improve Investment Performance Of Individual Investors?," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.
  13. Patrick Roger, 2012. "Portfolio diversification dynamics of individual investors: a new measure of investor sentiment," Working Papers of LaRGE Research Center 2012-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
  14. Amal Aouadi & Mohamed Arouri & Frédéric Teulon, 2014. "Investor Following and Volatility: A GARCH Approach," Working Papers 2014-286, Department of Research, Ipag Business School.
  15. Rawley Z Heimer, 2013. "Friends do let friends buy stocks actively," Working Paper 1314, Federal Reserve Bank of Cleveland.
  16. Vozlyublennaia, Nadia, 2014. "Investor attention, index performance, and return predictability," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 17-35.

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