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The Impact of Individual Investor Trading on Stock Returns

Author

Listed:
  • Zhijuan Chen
  • William T. Lin
  • Changfeng Ma
  • Zhenlong Zheng

Abstract

In this paper, we study the impact of the trading of individual investors on short-horizon stock returns from 2005 to 2006 using a unique data set provided by the Taiwan Stock Exchange. We examine the predictability of stock returns based on net individual trading by using the portfolio-sorting approach and the Fama-MacBeth regression method. Contrary to previously offered conclusions, we find that the imbalance in individual trading negatively predicts future stock returns on a stock-by-stock basis, which indicates that individual investors can be viewed as noise traders to some extent. At the same time, using the principal component analysis, we find that the noise trading of individuals is not systematic.

Suggested Citation

  • Zhijuan Chen & William T. Lin & Changfeng Ma & Zhenlong Zheng, 2013. "The Impact of Individual Investor Trading on Stock Returns," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(S3), pages 62-69, July.
  • Handle: RePEc:mes:emfitr:v:49:y:2013:i:s3:p:62-69
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    Citations

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    Cited by:

    1. 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.
    2. Berna Aydogan, 2017. "Sentiment dynamics and volatility of international stock markets," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 407-419, December.
    3. Zhijuan Chen & William T. Lin & Changfeng Ma & Kent Wang, 2020. "Are individual investors liquidity providers around earnings announcements? Evidence from an emerging market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3447-3475, December.
    4. Chen, Zhijuan & Lin, William T. & Ma, Changfeng, 2019. "Do individual investors demand or provide liquidity? New evidence from dividend announcements," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    5. Pan, Deng & Shi, Jing & Wu, Fei & Zhang, Bohui, 2015. "Investor heterogeneity and commonality in stock return and liquidity," Economic Systems, Elsevier, vol. 39(3), pages 458-473.

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