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Can Individual Investors Beat the Market?

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Author Info

  • JOSHUA D. COVAL

    (Harvard University - Finance Unit)

  • David Hirshleifer

    (Fisher College of Business, Ohio State University, Department of Finance)

  • TYLER G. SHUMWAY

    (University of Michigan)

Abstract

We document strong persistence in the performance of trades of individual investors. Investors classified in the top 10 percent place other trades that on average earn excess returns of 15 basis points per day. A rolling-forward strategy of going long firms purchased by previously successful investors and shorting firms purchased by previously unsuccessful investors results in excess returns of 5 basis points per day. These returns are not confined to small stocks nor to stocks in which the investors are likely to have inside information. Our results suggest that skillful individual investors exploit market inefficiencies to earn abnormal profits, above and beyond any profits available from well-known strategies based upon size, value, or momentum.

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File URL: http://128.118.178.162/eps/fin/papers/0412/0412005.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0412005.

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Length: 45 pages
Date of creation: 04 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0412005

Note: Type of Document - pdf; pages: 45. PDF
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Web page: http://128.118.178.162

Related research

Keywords: Individual Investors; Market Efficiency; Performance Persistence;

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References

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  1. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  2. Klaas Baks & Andrew Metrick & Jessica Wachter, . "Should Investors Avoid All Actively Managed Mutual Funds? A Study in Bayesian Performance Evaluation," Rodney L. White Center for Financial Research Working Papers 18-99, Wharton School Rodney L. White Center for Financial Research.
  3. Hirshleifer, David, 2001. "Investor Psychology and Asset Pricing," MPRA Paper 5300, University Library of Munich, Germany.
  4. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
  5. Judith Chevalier & Glenn Ellison, 1996. "Are Some Mutual Funds Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance," NBER Working Papers 5852, National Bureau of Economic Research, Inc.
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  7. 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.
  8. Klaas Baks & Andrew Metrick & Jessica Wachter, 1999. "Bayesian Performance Evaluation," NBER Working Papers 7069, National Bureau of Economic Research, Inc.
  9. Russ Wermers, 2000. "Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses," Journal of Finance, American Finance Association, vol. 55(4), pages 1655-1703, 08.
  10. Loughran, Tim & Ritter, Jay R., 2000. "Uniformly least powerful tests of market efficiency," Journal of Financial Economics, Elsevier, vol. 55(3), pages 361-389, March.
  11. Lehmann, Bruce N & Modest, David M, 1987. " Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," Journal of Finance, American Finance Association, vol. 42(2), pages 233-65, June.
  12. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1996. "The Persistence of Risk-Adjusted Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 69(2), pages 133-57, April.
  13. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, vol. 89(5), pages 1279-1298, December.
  14. KENT D. DANIEL & David Hirshleifer & AVANIDHAR SUBRAHMANYAM, 2004. "A Theory of Overconfidence, Self-Attribution, and Security Market Under- and Over-reactions," Finance 0412006, EconWPA.
  15. Brown, Stephen J, et al, 1992. "Survivorship Bias in Performance Studies," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 553-80.
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Citations

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Cited by:
  1. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc.
  2. Gina Nicolosi & Liang Peng & Ning Zhu, 2003. "Do Individual Investors Learn from Their Trading Experience?," Yale School of Management Working Papers ysm439, Yale School of Management, revised 01 Sep 2009.
  3. Andersson, Patric, 2004. "How well do financial experts perform? A review of empirical research on performance of analysts, day-traders, forecasters, fund managers, investors, and stockbrokers," Working Paper Series in Business Administration 2004:9, Stockholm School of Economics.
  4. HAMADI, Malika & RENGIFO, Erick & SALZMAN, Diego, 2005. "Illusionary finance and trading behavior," CORE Discussion Papers 2005004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Glaser, Markus & Weber, Martin, 2005. "Which Past Returns Affect Trading Volume?," SIFR Research Report Series 35, Institute for Financial Research.
  6. Malika, HAMADI & Erick, RENGIFO & Diego SALZMAN, 2004. "Illusionary Finance and Trading Behavior," Discussion Papers (ECON - Département des Sciences Economiques) 2005012, Université catholique de Louvain, Département des Sciences Economiques, revised 15 Jan 2005.
  7. David Hirshleifer & James N. Myers & Linda A. Myers & Siew Hong Teoh, 2004. "Do Individual Investors Drive Post-Earnings Announcement Drift? Direct Evidence from Personal Trades," Finance 0412003, EconWPA.

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