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Which past returns affect trading volume?

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  • Glaser, Markus
  • Weber, Martin
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    Abstract

    Anecdotal evidence suggests and recent theoretical models argue that past stock returns affect subsequent stock trading volume. We study 3,000 individual investors over a 51 month period to test this apparent link between past returns and volume using several different panel regression models (linear panel regressions, negative binomial panel regressions, Tobit panel regressions). We find that both past market returns as well as past portfolio returns affect trading activity of individual investors (as measured by stock portfolio turnover, the number of stock transactions, and the propensity to trade stocks in a given month). After high portfolio returns, investors buy high risk stocks and reduce the number of stocks in their portfolio. High past market returns do not lead to higher risk taking or underdiversification. We argue that the only explanations for our findings are overconfidence theories based on biased self-attribution and differences of opinion explanations for high levels of trading activity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 12 (2009)
    Issue (Month): 1 (February)
    Pages: 1-31

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    Handle: RePEc:eee:finmar:v:12:y:2009:i:1:p:1-31

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    Web page: http://www.elsevier.com/locate/finmar

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    Keywords: Individual investors Investor behavior Trading volume Stock returns and trading volume Overconfidence Differences of opinion Discount broker Online broker Panel data Count data;

    References

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    Cited by:
    1. Orhan Erdem & Evren Arik & Serkan Yüksel, 2013. "Trading Puzzle, Puzzling Trade," Working Paper 05, Research and Business Development Department, Borsa Istanbul.
    2. Ying Luo, Guo, 2013. "Can representativeness heuristic traders survive in a competitive securities market?," Journal of Financial Markets, Elsevier, vol. 16(1), pages 152-164.
    3. Abreu, Margarida & Mendes, Victor, 2012. "Information, overconfidence and trading: Do the sources of information matter?," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 868-881.
    4. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
    5. Ann Yang, 2013. "Decision Making for Individual Investors: A Measurement of Latent Difficulties," Journal of Financial Services Research, Springer, vol. 44(3), pages 303-329, December.
    6. Deaves, Richard & Lüders, Erik & Schröder, Michael, 2005. "The Dynamics of Overconfidence: Evidence from Stock Market Forecasters," ZEW Discussion Papers 05-83, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    7. Juhani T. Linnainmaa, 2011. "Why Do (Some) Households Trade So Much?," Review of Financial Studies, Society for Financial Studies, vol. 24(5), pages 1630-1666.
    8. Chou, Robin K. & Wang, Yun-Yi, 2011. "A test of the different implications of the overconfidence and disposition hypotheses," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2037-2046, August.
    9. Wongchoti, Udomsak & Wu, Fei & Young, Martin, 2009. "Buy and sell dynamics following high market returns: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 12-20, March.
    10. Nguyen, Nhut H. & Truong, Cameron, 2013. "The information content of stock markets around the world: A cultural explanation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 1-29.
    11. Pikulina, E.S. & Renneboog, L.D.R. & Horst, J.R. ter & Tobler, P.N., 2013. "Bonus Schemes and Trading Activity," Discussion Paper 2013-030, Tilburg University, Center for Economic Research.
    12. Wei-Xing Zhou & Guo-Hua Mu & Si-Wei Chen & Didier Sornette, . "Strategies used as Spectroscopy of Financial Markets Reveal New Stylized Facts," Working Papers ETH-RC-11-005, ETH Zurich, Chair of Systems Design.
    13. Chou, Pin-Huang & Huang, Tsung-Yu & Yang, Hung-Jeh, 2013. "Arbitrage risk and the turnover anomaly," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4172-4182.

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