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Do Limit Orders Alter Inferences about Investor Performance and Behavior?

  • JUHANI T. LINNAINMAA
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    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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    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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